Depreciation Accounting - General Questions and Answers:

Learning Objectives:

1. Answers of some of the general questions about depreciation accounting.

Theoretical:

1. What is depreciation and how is it brought about?

2. Name the different methods of providing for depreciation, and discuss any one of them in detail?

3. Explain the difference between (i) depreciation and fluctuation (ii) depreciation and obsolescence. How should obsolescence be provided for.

4. What are the objects of making provision for depreciation of the fixed assets of a business.

5. Why should depreciation on fixed assets be brought into account. Discuss in detail the several methods of providing for depreciation.

6. What is depreciation? Does it depend on the market value of the asset? Why is it necessary to provide for depreciation of assets while preparing the balance sheet.

7. Explain briefly the nature and use of the "revaluation process" of depreciation.

8. Which is the best method of providing for depreciation of the following assets:
   Loose tools, machinery, live stock, lease, motor vehicles.

Answers:
To find the answers of all the questions above, please read our accounting for depreciation chapter in detail. Click here to start now.

Objectives:

A. State whether each of the following statements are true or false:

1. The objective of charging profit and loss account with the amount of depreciation is to spread the cost of an asset over its useful life for the purpose of income determination.

2. The amount of depreciation is credited to depreciation fund account in case of annuity method.

3. The charge for use of the asset remains uniform each year in case of straight line method.

4. Depreciation is charged on the book value of the asset each year in case of diminishing balance method.

5. Depletion method is suitable for charging depreciation in case of stock or loose tools.

6. Net charge to the profit and loss account is the same under both annuity method and depreciation fund method.

7. The amount of depreciation is credited to the depreciation fund account in the depreciation fund method.

8. The asset appears always at original cost in case depreciation is credited to provision for depreciation account.

9. In case of insurance policy method, the depreciation is credited to the asset account.

Answers:

B. Indicate the alternative which you consider to be correct.

1. Depreciation is a process of:
   
   i. Valuation.
   ii. Allocation.
   iii. Both valuation and allocation.
   iv. Non of these.
    

2. The main objective of providing depreciation is:
   
   i. To allocate true profit.
   ii. To show the true financial position in the balance sheet.
   iii. To reduce tax burden.
   iv. To provide funds for replacement of fixed assets.
    

3. Depreciation arises because of:
   
   i. Fall in the market value of an asset.
   ii. Physical wear and tear.
   iii. Fall in the market value of money.
    

4. Under the straight line method of charging depreciation, it:
   
   i. Increases every year.
   ii. Decreases every year.
   iii. Is constant every year.
    

5. Under the diminishing balance method, the depreciation is calculated on:
   
   i. Original cost.
   ii. Written down value.
   iii. The scrap value
    

6. A diminishing balance method of providing depreciation is one according to which:
   
   i. The amount of depreciation is reduced year to year.
   ii. The rate percent of depreciation declines from year to year.
   iii. The rate percent as well as the amount reduces every year.
    

7. Depreciation on diminishing balance method of $2,000 at the rate of 10% p.a after three years will be:
   
   i.  $1,400
   ii. $1,458
   iii. $542
   iv. Non of the above.
    

8. The amount of depreciation charged on a machinery will be debited to:
   
   i. Machinery a/c.
   ii. Depreciation account.
   iii. Cash account.
    

9. Loss on the sale of machinery should be written off against:
   
   i. Share premium account.
   ii. Sales account
   iii. Depreciation fund account

Answers:

C. Fill in the blanks

1. The total amount of depreciation to be written off over the life of an asset is equal to the cost of the asset less its ________.

2. Obsolescence and inadequacy are called the ________ factors causing depreciation.

3. Over or under provision of ________ is taken to profit and loss account as profit or loss at the time of termination or sale of assets.

4. The useful life of depreciable asset for an enterprise may be ________ than its physical life. This is usually because of such factors as _________ and ________.

5. In the case of wasting assets the amount of charge determined on the basis of exhaustion of the asset is known as ________.

Answers:

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