International Commerce Olympiad

Depreciation and Reserves

1. Which of the following is a correct distinction between a Revenue reserve and a Capital reserve?

(a) A revenue reserve is created out of capital profits whereas a capital reserve is created out of business profits.

(b) A revenue reserve can be used for distribution of dividend with certain preconditions whereas a capital reserve can be used for distribution of dividend without any preconditions.

(c) A revenue reserve is created for strengthening the financial position whereas capital reserve is created for meeting capital losses or to be used for purposes specified by the Companies Act.

(d) There is no distinction between revenue reserve and capital reserve.

Ans: (c) A revenue reserve is created for strengthening the financial position whereas capital reserve is created for meeting capital losses or to be used for purposes specified by the Companies Act.

2. Depreciation is:

(a) a process of valuation of fixed assets

(b) a process of allocation of the cost of fixed asset over useful life of the

asset

(d) None of the above

Ans: (b) a process of allocation of the cost of fixed asset over useful life of the

asset

3. If the amount of any known liability can not be determined accurately.

(a) Provision should be created

(b) Definite liability should be created

(d) Should be shown as a contingent liability

Ans: (a) Provision should be created

4. Which of the following is a correct difference between a provision and reserve:-

(a) A provision is created out of a legal necessity whereas

a reserve is created as a matter of prudence.

(b) A provision is invested whereas reserve is not invested.

(d) A provision can be used for distribution of dividend whereas a reserve

cannot be allowed to be used for distribution of dividend.

Ans: (a) A provision is created out of a legal necessity whereas

a reserve is created as a matter of prudence.

5. Which one of the following is not a feature of written down value method of depreciation?

(a) The book value of the asset becomes zero at any one point of time

(b) The depreciation is calculated on the book value of assets and not on the

cost.

(d) There is no need to estimate the residual value and estimated life at the

time of deciding the amount of depreciation.

Ans: (a) The book value of the asset becomes zero at any one point of time

6. Which of the following best describes the “Depreciation”?

(a) Valuation of fixed asset at the end of the year.

(b) Verification of assets

(d) Decreasing the market value of asset

Ans: (c) Allocation of cost of fixed assets over its useful life.

7. Which of the following statement is not appropriate in relation to “Provision”?

(a) Provision is a charge against profit

(b) Provision is created for known liability

(d) Creation of provision satisfies the principle of conservatism.

Ans: (c) Provision is created for strengthening the financial position of the business.

8. Which of the following is not true about Reserves?

(a) Reserves can be created for general and specific purposes

(b) Reserves are charges against profits

(d) Reserves are shown in liability side of Balance sheet

Ans: (b) Reserves are charges against profits

9. Depreciation:

a) Can be provided only in case of profits

(b) Can not be provided in case of loss

(d) Need not be provided if the market value of the asset exceeds the cost of the asset.

Ans: (c) Is to be provided irrespective of the fact whether there are profits or losses

10. What is the Journal Entry for depreciation when ‘Provision for Depreciation’ exits?

(a) Dr. Depreciation Account and Cr. Asset Account

(b) Dr. Profit and Loss Account and Cr. Depreciation Account

(d) Dr. Provision for Depreciation Account and Cr. Profit and Loss Account

Ans: (c) c Is to be provided irrespective of the fact whether there are profits or losses

11. Scrap value of an asset means the amount which it can fetch on sale at the ......... of its useful life.

(a) Beginning (b) End

Ans: (b)End

12. Present liability of uncertain amount which can be measured reliably by using a substantial degree of estimation is termed as

(a) Provision (b) Liability

Ans: (a)provision

13. With reference to Provision, which of the following option is correct ?

(a) Liability of uncertain amount which can be measured reliably by using

substantial degree of estimation

(b) Liability of certain amount which can not be measured reliably by using

substantial degree of estimation

(d) Liability of uncertain amount which can not be measured reliably by

using substantial degree of estimation

Ans: (a)Liability of uncertain amount which can be measured reliably by using

substantial degree of estimation

14. Which term is used as fall in quantity of material or asset in context of natural

resources

(a)Depletion (b) Obsolescence

Ans: (a) Depletion

15. If a firm maintains provision for depreciation account, then asset account is

shown in the books of account at

(a) Market Price (b) Book Value

Ans: (c) cost price

16.Puneet has closing stock of ₹ 30,000 in his books. Should he provide

depreciation on it?

(a) Yes, because it is a fixed asset

(b) No, because it is a fixed asset

(d) No, because it is a current asset

Ans: (d) No, because it is a current asset

17. The balance of provision for depreciation account show .........

(a) Current year depreciation charged

(b)Total depreciation charged on assets up to date of balance

(d)Deprecation on assets sold

Ans: (b) Total depreciation charged on assets up to date of balance

18. Profit on sale of vehicle is (i) .................. and will be transferred to (ii) .................. Reserve.

(a) (i) Gain (ii) Capital (b) (i) Profit (ii) Capital

Ans: (a) (i) Gain (ii) Capital

19. Due to new inventions and improvement techniques the old assets becomes outdated and may have to be discarded even if they can be put in use physically, it is known as:

(a) Obsolescence (b) Depletion

Ans: (a) Obsolescence

20. What is the amount of difference between the closing balances of two machines after two years if both machines were purchased on the same date with the same amount i.e. for ₹ 1,00,000 Machine I is depreciated by 20%

p.a on Straight Line Method and Machine II is depreciated by 20% p.a.

Diminishing Balance Method:

(a) Value of machine II is more by ₹ 2,000.

(b) Value of machine I is more by ₹ 4,000.

(d) Value of machine II is less by ₹ 2,000.

Ans: (c) Value of machine II is more by ₹ 4,000

21. Ambuja Cement Ltd. purchased a machine on 1.1.2019 for ₹ 1,20,000. Installation expenses were ₹ 10,000. Its residual value after 10 year is

₹ 5,000. On 01.03.2019 expenses on its repairs were incurred to the extent of ₹ 2,000. Depreciation is provided under straight line method. Books are closed on 31st March every year. The amount of depreciation for the current year will be:

(a) ₹ 3,125 (b) ₹ 3,175

Ans: (c) ₹ 12,500

22. The balance of machine on 31st March 2019 is ₹ 97,200. The machine was purchased on April 2017. Depreciation charged @10% p.a. by diminishing balance method. The cost price of the machine as on 1st April 20017 would be of

(a) ₹ 1,00,000 (b) ₹ 1,20,000

Ans: (b) ₹ 1,20,000

23. What will be the percentage of depreciation under SLM in the following

case:

Origional Cost of Machine ₹ 1,50,000

Salvage value after 9 years ₹ 15,000

Repair charges in 2nd year ₹ 10,000

(a) 11.11% (b) 10%

Ans: (b)10%

24. A machine was purchased on 1st April 2019 for ₹ 5,00,000 and on 1st October, 2019 a new machine is added for ₹ 2,00,000. Calculate the balance of machine account, if depreciation is charged at 20% p.a on written down value method for the year ending March 31, 2020

(a) ₹ 6,00,000 (b) ₹ 5,60,000

Ans: (d) ₹ 5,80,000

25. In the trial balance debtors are ₹ 80,000, Bad debts are ₹ 5,000. An additional bad debts amounted to ₹ 4,000 and firm creates a provision for doubtful debts @10% of debtors. The amount required for provision for bad debt is

(a) ₹ 8,000 (b) ₹ 7,100

Ans: (c) ₹ 7,600

26. In the books of Metro Publishing Ltd., the machinery account shows a debit balance of ₹ 1,20,000 as on April 1, 2015. The machinery was sold on September 30, 2016 for ₹ 60,000.

The company charges depreciation @ 20% p.a., on diminishing balance method. Depreciation for 2016-2017 and loss on sale will be:

(a) ₹ 9,600 and ₹ 26,400 (b) ₹ 12,000 and ₹ 26,400

Ans: (a) ₹ 9,600 and ₹ 26,400

27. Original Cost of the Machinery ₹ 1,00,000, Expected useful life of the machinery is 5 years, Expected salvage value is ₹ 2,000. Rate of depreciation will be

(a) 19.6% (b) 20%

Ans: (a) 19.6%

28. On 1st April, 2012, a machine was purchased for ₹ 1,00,000 and in the same year on 1st October, another machine was purchased for ₹ 50,000. Depreciation on the machinery is charged by straight line method @ 10% p.a.

At what amount, the machine should be shown in the books on 31st March

2014.

(a) ₹ 1,33,500 (b) ₹ 1,22,500

Ans; (b) ₹ 1,22,500

29. A machine has been purchased for ₹ 3,00,000 on Jan. 1, 2014 and depreciation charged on it @ 10% p.a on Written Down Value Method. What will be the book value of machine on March 31,2014.

(a) ₹ 2,70,000 (b) ₹ 2,85,000

Ans: (d) ₹ 2,92,500

30. The book value of an asset after two years of providing depreciation on written down value method @ 10% p.a. is ₹ 89,100. Its original value was

(a) ₹ 90,000 (b) ₹ 1,10,000

Ans: (b) ₹ 1,10,000

31. Which account will be debited and credited if there is sale of Fixed Asset?

(a) Debit Cash/Bank and Credit asset disposal.

(b) Debit Cash/Bank and Credit Profit and Loss.

(d)Debit P and L and Credit asset disposal.

Ans: (a) Debit Cash/Bank and Credit asset disposal

32.The following balances are appearing in the books of Mr. X on 1st April, 2014 Plant ₹ 10,00,000 and Provision for Depreciation ₹ 1,92,000. Depreciation charged @ 20% by written down value method. A part of plant purchased on 1st April 2013 for ₹ 2,00,000 sold on 1 Oct, 2014 for ₹ 1,20,000. Calculate the amount of depreciation to be transferred from Provision for Depreciation to Asset (Plant) Account.

(a) ₹ 80,600 (b) ₹ 42,400

Ans: (c) ₹ 56,000

33. A firm charges depreciation @20 % p.a by Written down value method every year. The balance of Machinery as on 31 March 2016, after one and half years was ₹ 5,76,000. What was the cost of Machinery on 01 October, 2014.

(a) ₹ 10,00,000 (b) ₹ 8,00,000

Ans: (b) ₹ 8,00,000

34. Which of the following is not the feature of depreciation?

(a) It is decline in book value of asset.

(b) It is cash expense invested every year within the business.

(d)Both (b) and (c)

Ans: (d)Both (b)and (c)

35. A firm purchased Motor vehicle of ₹ 5,00,000 on 1st July, 2013 and spent ₹ 1,00,000 on registration of vehicle as commercial vehicle. Depreciation is to be charged @ 20% p.a. by Straight line method every year. On 1st April, 2016 the vehicle was sold at a loss of ₹ 40,000.

What was the sale price of vehicle? Books are closed on 31st March of every

year.

(a) ₹ 1,85,000 (b) ₹ 3,10,000

Ans: (d) ₹ 2,30,000

36. The balance of machinery account on 31-03-2017 was ₹ 2,56,000. The machinery was purchased on 01-04-2015. Depreciation is charged 20% p.a. by diminishing balance method on 31st march every year. The cost price of the machine on 01-04-2015 was:

(a) ₹ 5,00,000 (b) ₹ 3,00,000

Ans: (c) ₹ 4,00,000

37. On 1st October, 2016, a Machinery was purchased for ₹ 4,85,000. Its estimated scrap value is estimated at the end of its useful life is ₹ 35,000. Depreciation charged on this Machinery for the year ending 31st March 2017 was ₹ 45,000. What is its estimated life?

(a)5 Years (b) 10 Years

Ans: (a) 5 Years

38. On 1st April, 2018 the Book value of Machinery was ₹ 6,48,000. This Machinery was purchased on 1st April, 2016 and depreciation was charged @10% p.a. on diminishing balance. What was the original Cost of Machinery?

(a) ₹ 8,00,000 (b) ₹ 10,00,000

Ans: (a) ₹ 8,00,000

39. On 01 April, 2016 ABC Ltd. purchased Furniture of ₹ 4,00,000 and paid GST @12%. Depreciation was to be provided @10% p.a by Fixed Installment system. What will be the book value of Furniture on 01 April,2018 in the books of the firm?

(a) ₹ 3,24,000 (b) ₹ 3,20,000

Ans: (a) ₹ 3,24,000

40. There are certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty because they are not yet incurred. It is necessary to make for such items for ascertaining true net profit.

(a) Liability (b) Provision

Ans: (b) Provision

41. In which of the following, combined expenditure on account of depreciation

and repairs will be lower in the earlier years and higher during the later years

(a) Diminishing balance method (b) Straight Line method

Ans: (b) Straight Line method

42. In the books of OPTIC Fiber Ltd, Plant and Machinery stood at ₹ 8,00,000 on 01/04/2017. During the year 2017-18 Additional Machinery was purchased for ₹ 4,00,000 on 01 October, 2017. The company charges depreciation @ 20% p.a. at diminishing balance method. The amount of depreciation for the year ended 31.03.2018 is:

(a) ₹ 2,00,000 (b) ₹ 2,40,000

Ans: (a) ₹ 2,00,000

43. Which of the following Asset does not depreciate?

(a) Machinery (b) Mines

Ans: (c) Land

44. Statement I: Depreciation is a continuing process

Statement II: Depreciation is a process of allocating the capital expenditure

over its life

Statement III: Depreciation must be deducted before calculating Taxable Profits.

(a) All the above statements are true

(b) Only I and II statements are true.

(d) Only II and III are true.

Ans: (a) All the above statements are true

45. A machinery was purchased on 1st April, 2016 for ₹ 4,00,000. Depreciation is to be charged @10% p.a by Diminishing Balance Method on 31st March every year. This Machinery was sold on 30th September 2018 for certain amount and thereby incurring a loss of ₹ 50,000.

What is the sale amount of machinery?

(a) ₹ 2,92,000 (b) ₹ 2,65,900

Ans: (c) ₹ 2, 57,800

46. Dumbo Ltd. purchased Machinery of ₹ 6,00,000 on 1st October 2014 and charged depreciation @10% p.a by Straight Line Method. Hitler Ltd. also purchased Machinery of ₹ 12,00,000 on 1st October 2014 and charged depreciation @20% p.a by Written Down Value Method. Which of the following holds true in respect of their book values on 31st March 2017

(a) Less Book Value in Dumbo Ltd

(b) High Book Value in Dumbo Ltd

(d) Information is Incomplete

Ans: (a) Less Book Value in Dumbo Ltd

47. If a firm maintains Provision for Depreciation Account, on the date of sale of asset which of the following entry will be passed to disclose the amount of depreciation charged till date of sale of that particular asset?

(a) Depreciation A/c Dr.

To Asset A/c

(b) Provision for Depreciation A/c Dr.

To Profit and Loss A/c

To Provision for Depreciation

(d) Provision for Depreciation A/c Dr.

To Asset A/c

Ans: (d) Provision for Depreciation A/c Dr.

To Asset A/c