Chapter # 6. DEPRECIATION

Chapter # 6		DEPRECIATION
Q.1:	What is deprecation?
Ans:	The process of allocating the cost of a fixed asset over its estimated useful life in a rational and systematic manner is called depreciation.
Q.2:	Give any three objects of providing depreciation?
Ans:	i)       To find out net profit or loss for an accounting period. ii)    To present a true and fair view of the state of affairs of her business. iii)  To replace the asset.
Q.3:	What will be the effect on profit and loss A/c and balance sheet, if depreciation is not provided?
Ans:	i)       Periodic expenses will be overstated ii)    Profit will be overstated iii)  Assets valuation will be overstated iv)   Capital depletion will be take place v)      Price determination will be inappropriate. vi)   Net worth will be overstated.
Q.4:	Name different steps which re necessary for charging depreciation?
Ans:	i)       Determination of cost of an asset ii)    Estimation of the useful life of the asset. iii)  Selection of method of allocated.
Q.5:	Define depreciation expense?
Ans:	The  allocated cost for one accounting period, which is matched against revenue, is called depreciation expense.
Q.6:	Define Accumulated Depreciation?
Ans:	The total allocated cost already charged as expense in different accounting periods is called accumulated depreciation.
Q.7:	Define written down value (W.D.V) or book value?
Ans:	The portion of the cost yet to be allocated is known as the written down value.
Q.8:	What do you mean by scrap value?
Ans:	The amount which will be realized at the end of the asset useful life is called scrap value or residual value or salvage value.
Q.9:	What is meant by Amortization?
Ans:	The process of allocating the cost of an intangible asset over its useful life in a rational and systematic manner is called amortization.
Q.10:	What do you mean by straight line depreciation method?
Ans:	The method under which cost of an asset is equally charged over the useful life of an asset is called straight line depreciation method?
Q.11:	Give any two advantages of straight line depreciation method?
Ans:	i)       Easy calculation of depreciation amount. ii)    Reducing the book value to zero.
Q.12:	Give any two disadvantages of straight line depreciation method?
Ans:	i)       Higher depreciation is charged in last year of asset useful life than its output. ii)    If an additional asset is acquired, the amount to be charged as depreciation to be recalculated.
Q.13:	Define diminishing balance method?
Ans:	The method in which asset is depreciated at fixed percentage over written down value of asset is called diminishing balance method.
Q.14:	Give any two advantages of diminishing balance method?
Ans:	i)       It is also acceptable for income tax purpose. ii)    No recalculation in necessary when additional asses are purchased.
Q.15:	Give any two disadvantages of diminishing balance method?
Ans:	i)       There is a lack of simplicity. ii)    The asset is never fully depreciated.
Q.16:	Differentiate between straight line and diminishing balance method?
Ans:	Straight line Diminishing Balance i)       Fixed amount is charged. Fixed rate is charged. ii)    The amount of depreciation per year remains same. The amount of depreciation goes on reducing.
Q.17:	Name any four methods of calculating depreciation?
Ans:	i)       Straight line method. ii)    Diminishing balance method. iii)  Sum of year digits method. iv)   Revaluation method.
Q.18:	Pass journal entry for charging depreciation?
Ans:	Depreciation A/c To Asset A/c
Q.19:	What will be the journal entry, if accumulated depreciation?
Ans:	i)       Wear & Tear ii)    Obsolescence iii)  Depletion iv)   Expiry of time v)      Fall in the market price
Q.20:	What do you mean by depletion?
Ans:	The process of measuring and recording the exhaustion of natural resources due to their use is called depletion.
Q.21:	What do you mean by obsolescence?
Ans:	A process of becoming out of date or obsolete is called obsolescence. In other words, reduction in the useful life of the asset arising from following factors. 1)     Change in technology 2)     Improvement in production method. 3)     Change in market demand.
Q.22:	Differentiate between depreciation and amortization?
Ans:	A process of recording the gradual decrease in physical asset due to its use in the business is called depreciation while a process of writing down the long – term in vestment in intangitle assets is called amortization.
Q.23:	Differentiate between depreciation and depletion.
Ans:	A process of recording the gradual decrease in physical fixed assets due to its use in the business is called depreciation while a process of measuring and recording the exhaustion of natural resources is called depletion.
Q.24:	Differentiate between fluctuation and depreciation?
Ans:	Depreciation is the gradual decrease in the value of fixed tangible asset due to its continuous use in the business while increase or decrease in the value of fixed assets due to market price or other factors is called fluctuation.
Q.25:	Why depreciation is not provided through any particular method for all assets.
Ans:	Fixed assets varies from each other in nature and use at such higher rate that the one method of providing depreciation cannot be applied to each assets.
Q.26:	What entry will be passed, if depreciation is transferred to profit and loss accounts?
Ans:	Original cost method shows equal amount of depreciation every year, so if the amount of depreciations is plotted on the graph paper. It will show a straight line, that is why, it is called straight line method.
Q.27:	What entry will be passed, if asset is sold on expiry of its useful life?
Ans:	Bank / cash a/c To Profit and loss a/c (Scrap value of asset sold)
Q.28:	What is the scope of application of straight line method?
Ans:	It is normally applied in case of those assets which have small value or which do not demand repairs etc. for example, patent, copyright etc.
Q.29:	What is the scope of application of diminishing balance method?
Ans:	This method is normally applied on those assets which demand large repair expenses and purchase and sale of assets is also very common.
Q.30:	What formula will be used to obtain the fixed percentage rat4e, under diminishing balance method?
Ans:	R = 1 – n r           =          Rate of depreciation n          =          The expected useful life S          =          The residual value C         =          The acquisition cost
Q.31:	If the cost of machine is Rs. 10,000 and scrap value after 4 year sis Rs. 2000, what will be the rate of depreciation?
Ans:	R = 1 - = 33.33%
Q.32:	What journal entry will be passed for interest, under the annuity method of depreciation?
Ans:	Asset a/c To Interest a/c
Q.33:	What entry will be passed for depreciation under annuity method?
Ans:	Depreciation a/c To Asset a/c
Q.34:	What formula is used to calculate depreciation under sum of years digits method?
Ans:	Depreciation = Depreciable amount x
Q.35:	What is the formula to compute the sum of year digits method?
Ans:
Q.36:	If the number of the years of assets useful life is 5 years calculate the sum of years, under sum of years digits method.
Ans:	S = S = 15 years.

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