CA SHUBHAM SETHI- LEADER IN ACCOUNTS COACHING

8588-95-3495

CLASS-11TH ACCOUNTS
MOST IMPORTANT QUESTIONS-
DEPRECIATION

Higher Order Thinking Skills (HOTS) Questions

Q. 1. Do you think Depreciation is the result of fluctuations in the value of fixed assets?
Ans. No, Depreciation is not a result of fluctuations in the value of fixed assets since the fluctuation is
concerned with the market price of a fixed asset whereas the Depreciation is concerned with the
historical cost (i.e., cost of acquiring fixed asset).

Q. 2. Do you agree that Depreciation is a permanent, continuing and gradual reduction in the
book value of a fixed asset?
Ans. Yes, Depreciation is permanent, continuing and gradual shrinkage in the book value of a fixed
asset.

Q. 3. Land is a depreciable asset. Comment.

Ans. Land is not depreciated because its useful life is unlimited.

Q. 4. If Depreciation reduces profits and value of fixed assets and thus, the capital of the owner,
why do businesses charge Depreciation?
Ans. Financial Statements must show a true and fair view of the financial performance and also
financial position of the business. If Depreciation is not charged, both profits and fixed assets would
be stated at inflated amounts. This will mislead the users of Financial Statements.

Q. 5. M/s. Business Services has not used its CNC Bending Machine No. 10 during the year.
Hence, the accountant has not provided Depreciation on it. Do you consider it to be correct?
Give your reasons.
Ans. No, I do not consider it to be correct because an asset does not depreciate only because of its use
but also because of the efflux of time. Although CNC Bending Machine No. 10 has not been used, its
value must have declined because of efflux of time.

Q. 6. Depreciation is a cash expenditure like other normal expenses. Comment.

Ans. Depreciation is a non-cash expenditure because it does not involve any cash outflow.

Q. 7. Depreciation cannot be provided in case of loss in a financial year. Comment.

PROF. SHEENA GUPTA- LEADER IN ECONOMICS COACHING

9811-792114
CA SHUBHAM SETHI- LEADER IN ACCOUNTS COACHING
8588-95-3495

Ans. Depreciation, being a charge against profit, has to be provided for, whether there is profit or loss
in a financial year. If depreciation is not charged, business will show lower loss and higher asset
value.
Q. 8. Which method of Depreciation assumes that an asset should be depreciated more in the
earlier years and less in the later years of use?
Ans. Diminishing Balance Method or Written Down Value Method of Depreciation assumes that the
asset should be depreciated more in the earlier years and less in the later years of use.

Q. 9. Depreciation for the second year @ 10% on Rs. 15,000 purchase price will be _____ on the
Fixed Instalment, whereas it will be _____ on the Diminishing Balance System.
Ans. Rs. 1,500; Rs. 1,350.

Q. 10. Given the same rate per cent, assets depreciate faster by the _____ as compared to the
_____.
Ans. Straight Line Method; Diminishing Balance Method.

Q. 11. What is the importance of the words ‘Per Annum’ for charging depreciation on fixed
assets?
Ans. When rate of depreciation is given with the words ‘per annum or p.a.\ like 10% per annum or
10% p.a., then depreciation is charged on the fixed asset only for the period for which the asset is
used. However, when depreciation rate is without the words ‘per annum’ then depreciation is charged
for the full accounting period, irrespective of the date of purchase of the asset.

SHORT QUESTIONS
Q. 1. Define Depreciation. (KVS 2011)
Ans. Depreciation is a fall in value of an asset because of its usage or with efflux of time or due to
obsolescence or accident.
“Depreciation is the permanent and continuing diminution in the quality, quantity or value of an
asset." —Pickles

Q. 2. What is Accumulated Depreciation?

Ans. It is the total depreciation already charged as expense in different accounting periods.

Q. 3. 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.

Q. 4, 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.

PROF. SHEENA GUPTA- LEADER IN ECONOMICS COACHING

9811-792114
 CA SHUBHAM SETHI- LEADER IN ACCOUNTS COACHING
8588-95-3495

Q. 5. Give any two causes of Depreciation. (Delhi 2012)

Ans. Causes of depreciation are:
(i) use of asset, and (ii) obsolescence.
Q. 6. What are the objectives of providing Depreciation? (Any two)
Ans. (i) To ascertain correct profit or loss, (ii) To show the assets at their proper value.

Q. 7. 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.

Q. 8. What is ‘Depreciable Cost’? (Delhi 2011)

Ans. Depreciable Cost = Cost of Asset — Scrap Value.

Q. 9. Give two methods of providing Depreciation. (Delhi 2012)

Ans. Methods of computing depreciation are:
(i) Straight Line Method, and (ii) Written Down Value Method.

Q. 10. 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.

Q. 11. 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.

Q. 12. What are the merits of Straight Line Method? (Any two)
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.

Q. 13. 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.

PROF. SHEENA GUPTA- LEADER IN ECONOMICS COACHING

9811-792114
 CA SHUBHAM SETHI- LEADER IN ACCOUNTS COACHING
8588-95-3495

Q. 14. 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.
Q. 15. 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.

Q. 16. Give the formula to calculate the Annual Depreciation as per ‘Straight Line Method’.
(Delhi 2010)
Cost of Asset − Estimated Scrap Value
Ans. Annual Depreciation = Number of Years of Expected Useful Life

Q. 17. What is the difference between Straight Line Method and Diminishing Balance Method
of charging Depreciation? (Any two)
Ans. (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 at a fixed percentage on the original
cost whereas under the Written Down Value Method, it is calculated on original cost (in first year)
and on written down value in subsequent years.

Q. 18. What is meant by Asset Disposal Account?

Ans. Asset Disposal Account means that the cost of the asset and also the provision for depreciation is
transferred to the account at the time of its sale (disposal). The sale proceeds are credited to the
account and gain (profit) or loss on sale on its disposal is determined.

Q. 19. What is the impact of GST Paid at the time of purchase of machinery on depreciation?
Ans. GST Paid does not have any impact on depreciation since GST Paid is not a cost of asset, it is
set-off against GST Collected.

Q. 20. What is the impact of GST Collected at the time of sale of asset on profit or loss?
Ans. GST Collected does not have any impact on profit or loss, it being a liability of the firm to
deposit in Government Account.

Objective Type Questions

Select the correct alternative:
(i) Depreciation arises because of __

PROF. SHEENA GUPTA- LEADER IN ECONOMICS COACHING

9811-792114
CA SHUBHAM SETHI- LEADER IN ACCOUNTS COACHING
8588-95-3495

(a) wear and tear. (b) inflation.

(c) fall in the value of the asset. (d) None of these.

(ii) The loss on sale of an asset is debited to

(a) reserves. (b) depreciation fund.
(c) Profit and Loss Account. (d) None of these.
(iii) The Diminishing Value Method means a method by which
(a) the rate of Depreciation falls year by year.
(b) the amount on which Depreciation is calculated falls year by year.
(c) the rate as well as the amount to which it is applied fall year by year.
(d) None of the above.

(iv) Straight Line Method of Depreciation is that method under which

(а) Depreciation is charged at a fixed percentage on the book value of the asset.
(b) Depreciation is charged at a fixed percentage on the original cost of the asset.
(c) Depreciation is charged on original cost of asset but the depreciation rate changes.
(d) None of the above.

(v) The amount of Depreciation charged on machinery is debited to

(a) Depreciation Account. (b) Machinery Account.
(c) Provision for Depreciation Account. (d) None of these.

(vi) Depreciation arises due to

(a) efflux of time. (b) fall in the market value of an asset,
(c) fall in the value of money. (d) None of these.

(vii) Depreciation is a process of

(a) valuation of asset.
(b) allocation of cost.
(c) both of valuation of asset and allocation of cost.
(d) None of the above.

(viii) A machinery which costs Rs. 2,00,000 is depreciated at 25% per year using the Written Down
Value Method. At the end of three years, it will have a net book value of
(a) Rs. 1,50,000. (b) Rs. 84,375.
(c) Rs. 1,12,500. (d) Rs. 1,00,000.

PROF. SHEENA GUPTA- LEADER IN ECONOMICS COACHING

9811-792114
CA SHUBHAM SETHI- LEADER IN ACCOUNTS COACHING
8588-95-3495

[(i) (a); (ii) (c); (iii) (b); (iv) (b); (v) (a); (vi) (a); (vii); (b); (viii) (b).]

PROF. SHEENA GUPTA- LEADER IN ECONOMICS COACHING

9811-792114