Tag: meaning and characteristics of provisions

Questions Related to meaning and characteristics of provisions

Provision is________________________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. An unknown liability but its amount and due date are determinate.

  2. An unknown liability and its amount and due date are determinate.

  3. A known liability and its amount and due date are determinate.

  4. A known liability but its amount and due date are indeterminate.

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Correct Option: D
Explanation:

Provision is a known liability but its amount and due date and indeterminate. It is basically setting an amount aside for a probable liability. 

Its a contingent loss that's recognized as a liability. 

X Ltd. acquired a lease right for 10 years of a mine on a lumpsum payment of Rs. 9,00,000 to the landlord. It was estimated by the coal deposit of the mine was 40,00,000 tonnes, 75% of which could be raised within time period allowed. X Ltd. decided to depreciate the lease on Depletion Method. The sales and stocks (in tonnes) were as under: 
Year                  I                 II               III             IV               V           VI
Sales              30,000        62,000     1,96,000    4,02,000    4,02,000    3,98,000
Closing Stock  10,000       8,000        12,000     10,0000    8,000      10,000
The depreciation for the year VI will be:

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Rs. 1,22,400

  2. Rs. 1,19,400

  3. Rs. 1,20,000

  4. None of these

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Correct Option: C

Provisions are _______.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Appropriation of profits

  2. Charge on profits

  3. Both

  4. None

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Correct Option: B
Explanation:

As against the common belief that provisions are a charge against profit, they can as well be an appropriation out of profits as in the case of proposed dividends. ... Once a provision is made, the relevant loss or expenditure has to be debited to the provision account.

Rate of depreciation under written down value method is 15% p.a. Cost of the machinery is Rs. 10,00,000. Residual value at the end of useful life is Rs. 20,000. Depreciation for the first year will be:

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Rs. 1,50,000

  2. Rs. 1,20,000

  3. Rs. 1,00,000

  4. Rs. 80,000

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Correct Option: A
Explanation:
Depreciation for the 1st year = Depreciable value x rate of depreciation
                                                = 10,00,000 x 15/100
                                                = RS-1,50,000

Accumulated depreciation account is shown in the final accounts:

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. On the liability side of the balance sheet.

  2. On the debit side of the profit and loss account.

  3. By deducting from the related asset account in the balance sheet.

  4. On the credit side of the profit and loss account.

Show answer
Correct Option: C
Explanation:

The accumulated depreciation account is an asset account with a credit balance (also known as a contra asset account); this means that it appears on the balance sheet as a reduction from the gross amount of fixed assets reported.

Provisions relating to accounts are contained in sections ______ of the Companies Act,2013.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. 120-134

  2. 128-137

  3. 205-230

  4. 199-210

Show answer
Correct Option: B
Explanation:

Provision relating to accounts are contained in sections 128-137 of the Companies Act, 2013.

Following is the list of section:

128 - Books of account, etc, to be kept by company
129 -  Financial statement
130 - Reopening of accounts on court's or Tribunal's orders
131 - Voluntary revision of financial statements or Board's report
132 - Constitution of National Financial Reporting Authority
133 - Central Government to prescribe accounting standards
134 - Financial statement, Board's report, etc
135 - Corporate Social Responsibility
136 - Right of member to copies of audited financial statement
137 - Copy of financial statement to be filed with Registrar

A company purchased new Machine for Rs. $50,000$ on $1$st April and spent Rs. $10,000$ on its installation and Rs. $5,000$ on transportation. The useful life of the machine is estimated $10$years. The firm provides depreciation using sum of years digit method. What is the depreciation for the last year of working life of the machine?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Rs. $936$

  2. Rs. $1,182$

  3. Rs. $1,325$

  4. Rs. $1,013$

Show answer
Correct Option: B
Explanation:

Depreciation expense is calculated under sum of year's digit method as:

Depreciation expense = (Remaining useful life of the asset / Sum of the year's digit) x Depreciable cost
Depreciable cost = Purchase cost + Installation cost + Transportation
Depreciable cost = Rs. 50,000 + Rs. 10,000 + Rs. 5,000 =  Rs. 65,000

Year   Deprecation base (a) Remaining life (b)  Depreciation fraction (b/sum) Depreciation expense   Book value
 1  65,000  10  10/55  11,818  53,182
 2   65,000  9  9/55  10,636  54,364
 3   65,000  8  8/55  9,455  55,545
 4   65,000  7  7/55  8,273  56,727
 5   65,000  6  6/55  7,091  57,909
6    65,000  5  5/55  5,909  59,091
 7   65,000  4  4/55  4,727  60,273
 8   65,000  3  3/55  3,545  61,455
 9   65,000  2  2/55  2,364  62,636
 10   65,000  1  1/55  1,182  63,818
   Total  55      

Present liability of uncertain amount, which can be measured reliably, is termed as __________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. provision

  2. liability

  3. contingent liability

  4. none of the above

Show answer
Correct Option: A
Explanation:
Provision means "any amount written off or retained by way of providing for depreciation in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy."