Q1. Define Depreciation.
Ans. Depreciation is a fall in value of an asset because of its usage or with efflux of time or due to obsolescences or accident, “Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset.”
Q2. What is Accumulated Depreciation?
Ans. It is the total depreciation already charged as expense in different accounting periods.
Q3. What is book value or written down value of a fixed asset?
Ans. It is the portion of the cost of a fixed asset which has not yet been depreciated. The book value of an asset is its cost when it is acquired. Thereafter, it is the cost less accumulated depreciation.
Q4. What is the residual or scrap value of the asset?
Ans. It is the estimated value of a fixed asset at the end of its useful life. It is the amount which is expected to be received when the asset is sold at the end of its useful life.
Q5. Give any two causes of Depreciation.
Ans. Causes of depreciation are:
(i) use of asset, and
Q6. What are the objectives of providing Depreciation? (Any two)
(i) To ascertain correct profit or loss.
(ii) To show the assets at their proper value.
Q7. What are the factors involved in providing Depreciation?
Ans. Factors involved in providing depreciation are:
(i) Historical cost of the asset.
(ii) Estimated residual value of the asset at the end of its useful life, and
(iii) Estimated effective life of the asset.
Q8. What is ‘Depreciable Cost’?
Ans. Depreciable Cost = Cost of Asset – Scrap Value.
Q9. What are the methods of computing Depreciation? Or Give two methods of providing Depreciation.
Ans. Methods of computing depreciation are:
(i) Straight Line Method, and
(ii) Written Down Value Method.
Q10. What is meant by Straight Line Method of providing Depreciation?
Ans. Straight Line Method of providing depreciation means depreciation is calculated at a percentage of original cost. Depreciation remains uniform from year to year.
Q11. What is meant by Written Down Value Method of providing Depreciation?
Ans. Written Down Value Method of providing depreciation means depreciation is calculated and charged at a fixed rate on written down value of the asset every year.
Q12. What are the merits of Straight Line Method?
Ans. Merits of Straight Line Method are:
(i) It is a simple method of providing depreciation.
(ii) Assets can be depreciated up to the estimated residual value.
Q13. What are the demerits of Straight Line Method? (Any two)
Ans. Demerits of Straight Line Method are:
(i) Interest element on capital is ignored.
(ii) Repair and Maintenance cost which is likely to be more in later years is not considered.
Q14. Give the formula to calculate the Annual Depreciation as per ‘Straight Line Method’.
Ans. Depreciation under Straight Line Method is computed as follows:
Annual Depreciation = Cost-Estimated Scrap Value
Number of Years of Expected Life
Q15. What is the difference between Straight Line Method and Diminishing Balance Method of charging Depreciation? (Any two)
(i) Under the Straight Line Method of Depreciation, Depreciation is uniform year after year whereas under the Written Down Value Method, it reduces every year.
(ii) Depreciation under the Straight Line Method is calculated on the original cost whereas under the Written Down Value Method, it is calculated on written down value (Book Value) every year.
Q16. What are the merits of Written Down Value Method? (Any two)
Ans. Merits of Written Down Value Method are:
(i) It takes into consideration repairs and maintenance cost in the later years.
(ii) It is accepted by the Income Tax Act.
Q17. What are the demerits of Written Down Value Method? (Any two)
Ans. Demerits of Written Down Value Method are:
(i) It is difficult to ascertain the correct rate of depreciation.
(ii) Under this method, value of asset cannot be zero.
Q18. Is depreciation a non-cash expenditure?
Ans. Yes. Because it does not involve any cash outflow.
Q19. Name the method of depreciation which assumes that the asset is depreciated more in the earlier years and less in the later years of its life.
Ans. Diminishing Balance Method.
Q20. Original Cost of a Machinery 5,00,000; Salvage value 20,000; Expected useful life 10 years. What will be the amount of depreciation for the fourth year according to original cost method? Also specify the rate of depreciation.
Depreciation = 5,00,000 - 20,000 = 48,000 each year.
Thus depreciation for IVth year will also be 48,000.
Rate of Depreciation = 48,000 x 100 = 9.6%
Q21. On 1st April, 2010 X Ltd. acquired a machine for 6,00,000. Installation expenses were 40,000. Residual value after 5 years 1,00,000. On 1st Oct. 2010 it incurred repair expenses of 20,000. What will be the annual depreciation under straight line method?
Ans. Annual Depreciation = 6,00,000 + 40,000 - 1,00,000 = 1,08,000.
Hint. Repairs will not be added to the cost of machinery since it is a revenue expenditure.
Q22. Original cost of a Machinery 5,20,000; Salvage Value 20,000. What will be the amount of depreciation for second year according to diminishing balance method @ 10% p.a.
Depreciation for first year = 5,20,000 x 10 = 52,000
Depreciation for second year = (5,20,000-52,000) x 10 = 46,800.
Q23. A machine was purchased on 1st April. 2008. The balance of this machine on 31st March, 2011 is 5,83,200. Depreciation is charged@10% p.a. on written down value method. What was the cost price of the machine on 1st April, 2008?
Cost Price of the Machine on 1st April, 2008 100
Less : Depreciation for 2008-09 10
Book Value on 1st April, 2009 90
Less : Depreciation for 2009-10 9
Book Value on 1st April, 2010 81
Less : Depreciation for 2010-11 8.10
Book Value on 1st April, 2011 72.90
If Book value on 1st April 2011 is 72.90, the cost was 100
If Book value on 1st April 2011 is 5,83,200 the cost was
5,83,200 x 1,00 = 8,00,000
Q24. Under which method the value of an asset can never be completely extinguished?
Ans. Diminishing Balance Method.
Q25. X Ltd. purchased a plant for 7,80,000 and spent 60,000 on its installation. Its scrap value is 42,000 and useful life 10 years. What will be the rate of depreciation as per straight line method?
Annual Depreciation = 7,80,000+60,000-42,000 = 79,800
Rate of Depreciation = 79,800 x 1,00 = 9.5%
Q26. Ram purchased computer on 1.04.2010 for 6,00,000. They are charging depreciation on written down value method. On 31.03.2011 they sold the computer for 1,65,000 and incurred a loss of 75,000. What was the rate of depreciation p.a.?
Sales Value 1,65,000
Add: Loss 75,000
Book Value on 31.3.2011 2,40,000
Cost on 1.4.2010 6,00,000
Book Value as % of cost = 2,40,000 x 100 40%
Depreciation % (100 - 40 ) 60%
Q27. Why depreciation is not charged on Land?
Ans. depreciation is not charged on land because its useful life is not limited to few years.
Q28. Reliance Co. did not use a particular machine during the current year. Should depreciation be charged on this machine also?
Ans. Yes. Depreciation must be charged because depreciation is caused not only because of its use but also because of efflux of time.
Q29. Is depreciation the result of fluctuations in the value of fixed asses?
Ans. No. Depreciation is not the result of fluctuations because fluctuations affect the market value of the asset whereas depreciation is not concerned with the marker value. It is a gradual and permanent decrease in the value of the asset.
Q30. Should depreciation be provided even if there is loss in a financial year?
Ans. Yes. Depreciation is a charge against profit and must be provided even if there is loss in a financial year. If it is not charged, the financial statements will show lower loss and higher value of assets.
Q31. “In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year”. Which method is suitable for charging depreciation if the management does not want to increase burden on Profit & Loss Account on account of depreciation and repair.
Ans. Written Down Value Method is suitable because under this method depreciation charge declines in later years. Hence, total of depreciation and repair charges remain similar or equal year after year.
Q32. Is it necessary to provide depreciation on a fixed asset of which the marker value is higher than its book value. Why?
Ans. It is necessary to provide depreciation even if the market value is higher than the book value. This is because depreciation is not related to the market value. It is not the process of valuation of asset but the process of allocation of the cost of an asset to its effective span of life.