THEOR¾TIOALQUESTIONS

(Remembering, Understanding and Applcation Based)

I Objective Type Questions

[AJ MultipleChoice Questions (Select the Best Alternative) :
1. According to ..."It is a matter of common knowledge that all fixed assets such as Plant,
Machinery, Building., Furniture etc.,gradually diminish in value as they get older and become
wom out by constant use in the business."
(A)RN. Carter (B) J.R. Batliboi
() Spicer and Pegler (D) Williams.
2. Depreciation means in the value of an Asset:
(A) Decrease (B) Increase
(C) Decrease and increase (D) Neither decrease nor inerease.
3. Characteristics of Depreciation are :
(A) Decrease in the value of an asset (B) Depreciation is of fixed nature
(C) Depreciation is fall in the value of assets due to their constant use, wear and tear and
obsolescence on expiry of time
(D) All of the above.
 4. Causes of Depreciation are:
(A) Wear and tear due to constant use (B) Obsolescence
(C) Accidents (D) Al of the above.
5. Main object of chargingdepreciation on fixed asset is:
(A) To save tax (B) To know correct financial position of
business the
(C) To reduce the profit of the business (D) To
6. With the rate of depreciation to have or not have increse the business expenses.
the words Per Annum, (P.A) is:
(A) Important (B) Unimportant
(C) llegal (D) Inconvenient.
7. Depreciation under fixed instalment method is calculated:
(A)On the reducing value of the Asset
(B) On the purchase price of the Asset
(C) In the first year on the purchase price and in
D) On the market price of the Asset.
remaining years on reducing balance
8. Depreciation is calculated under diminishing balance method:
(A)On the depreciated amount of the Asset
(B) On the purchase price of the Asset
(C) In the first year on the purchase price of the asset and in
balance of the Asset remaining year on diminishing
D) On the market price of the Asset.
9. Life of a machine is 10 years and its purchase price is 20,000.
Its installation charges 4,000.
Its scrap value is ? 6,000. Its yearly depreciation according to fixed
instalment system will be:
(A) ? 2,000 (B)? 1,000
(C) 1,000 (D) ? 2,400.
10. Amachine is purchased for ? 10,000. Its installation charges are 1,000. Its
value is 2,000 and its estimated life period is 10 years. Depreciation for whole estimated scrap
machine willbe: life period of
(A) 9,000 (B) ?7,000
(C) ?11,000 (D) ? 12,000.
1. In diminishing balance method depreciation is charged :
(A) At market price of the Asset (B) On the purchase price af the Asoet
() On the depreciated value of the Asset
(D) On the opening balance each year of the Asset.
12 The depreciation is calculated
(A)On fixed Assets (B) On current Aasets
() On fctitious Assets (D)On all of the above.
13. In Fixed Inatalment System, the amount of depreciatlan la always
A) Increases (B) Decreases
() Pixed (D) All of the above.
14. On lst October, 2013 Ram purchased a machine for 180,000 and spent 20,000 for its
installation. Depreciation is charged at the rate of 10% per annum on original cost every year.
Books are closed on 31st March every year. The Ist year's depreciation willbe:
(A)? 20,000 (B) 10,000
(C) 5,000 (D)18,000.
15. Amachine was purchased on Ist )Jan, 2013 for 20,000. On Ist July, in the same year additional
machinery costing 10,000 was acquired. Depreciation is provided annually on 31st Dec.@
10% per annum on original cost of the assets. The amount of depreciation in the Ist year will
be:
(A)3,000 (B)2,000
()? 2500 (D) ? 1,500.
16. A Company purchased a Plant on 1st April, 2013 for ? 30,000. It purchased another Plant
on Ist Oct., 2013, Costing 20,000. Depreciation is charged @ 10% per annum by Fixed
Instalment System. Books are closed on 31st Dec., each year.The amount of depreciation for
the 1st year will be:
(A) 3 2,750 (B) 5,000
(C)? 2,500 (D) 3,00.
17. The book value of a Machinery on Ist Jan., 2013 was 2,00,000. Another machinery for ?
10,000was purchased on Ist Oct, 2013. Depreciation is charged at 10% per annum on Straight
line method. The amount of depreciation in the Ist year willbe :
(A) ? 21,000 (B) 20,250
()? 10,500 (D) 20,000.
18. On Ist Jan., 2013 a company purchased a machinery for? 16,000 and immediately spent ?
4,000on its installation. Depreciation is charged @15% per annum by Diminishing Balance
method. The amount of depreciation in the 2nd year will be:
(A)3,000 (B) ?2,000
()2,550 (D) ? 2,400.
19. Afirm purhased on Ist Jan., 2013 a machinery costing ? 5,000. Addition was
2nd year to the extent of 1,000. Depreciation is charged at 10% per annum made in June in
by Diminishing
Balance Method. The amount of depreciation in the 2nd year will be:
(A)500 (B) 600
()I 0 (D) None of the above.
20. Depreciation charged on Building will be debited to :
(A) Building A/c (B) Depreciation A/e
(C) Cash A/c (D)Goods A/c.
21. Depreciation arises :
(A)Due to fall in the value of money (B) Due to physical wear and tear
(C) Due to fallin the market value of Asset (D) None of the above.
22. Depreciation of aset for business is :
(A) Expense (B) Income
(C) Loss (D) Gain.
 4. The need for providing depreciation is for :
(A) Ascertaining cost of production (B) Ascertaining true profit or loss
(C) Showing true financial position (D) All of the above.
24. Points are considered at the time of computation of depreciation :
(A) Actual cost of the asset (B) Estimated working life of the asset
(C) Estimated scrap value of the asset (D) All of the above.
25. Depreciation is the process of :
(A) Allocation of cost (B) Valuation of asset
(C) Both of allocation and valuation (D)None of the above.
26. Under fixed instalment system of depreciation, if cost of an asset is45,000, scrap value is
5,000and depreciation rate is 10%. The amount of depreciation for the first year will be :
(A)4,500 (B) 4,000
(C) 5,000 (D) 2,000.
27. In which of the following methods the amount of depreciatiorn remains the same through out:
(A) Fixed Instalment Method (B) Diminishing Balarnce Method
() Fixed and Diminishing Balance Methods (D) Neither
Method.
Fixed nor Diminishing Balance
28. Diminishing Balance Method is used for charging depreciation :
(A) On the current assets (B) On the fixed assets
(C) On the fictitious assets (D) On the liquid assets.
29. Cost price of amachine is 20,000 and installation charges on its are 5,000. Its scrap value is
7000. Its working life is 10years. The amount of depreciation for the first years will be:
(A)? 2,500 (B) 2,00
()?2,700 (D) ? 1,800.
30. Depreciation in the value of Asset is :
(A)Permanent decrease (B) Temporary decrease
(C) Permanent increase (D) Temporary increase.
31 The different methods of depreciation are :
(B) Diminishing Balance Method
(A) Fixed instalment System
(D) Alof the above.
() Depreciation Fund Method
32. In case of purchase of an asset is debited to:
(B) Goods A/c
(A) Purchases A/c
(D) Cash A/c.
() Assets A/e
33. In ccase of sale of an asset is credited :
(B) Asset A/e
A)Sales Ale
(D) Cash A/c.
() Goods A/e
34. On closing the Depreciation A/c at the close of the year the a/e is credited :
(B) Aset A/e
(A)Depreciation A/c
(D) None of the above.
()Profit and Loss A/c
 35. On charging the depreciation at the close of the year will be debited to :
(A)Asset A/c (B) Depreciation A/c
(C) Cash A/c (D) Goods A/c.
36. On charging the depreciation at the close of the year will be credited to :
(A) Goods A/c (B) Purchases A/c
() Profit and Loss A/c (D) Asset A/c.
37. A. Machine costing 10,000was purchased on Ist April, 2012. Depreciation is charged at 10%
p.a. by Fixed Instalment Method. In the Ist year, the amount of depreciation will be :
(A) ? 1,000 (B) ? 750
(C) 500 (D) None of the above.
38. The merits of Diminishing Balance Method are:
(A)Easy in calculation (B) Proper burden on Profit and Loss A/c
(C) The value of Asset never becomes zero (D) Allof the above.
39. A firm purchased on Ist Jan., 2012 a second-hand Machinery for 3,000 and spent
its establishment. On Ist July in the same year another Machinery costing 2,500 2,000 on
was purchased.
Depreciation is provided annually on 31st Dec.,@5% per annum on the written down value
method. The amount of depreciation in the Ist year will be:
(A)? 750 (B) ?375
(C)?312.50 (D) ? 500.
40. In case of preparing the Provision for Depreciation A/, the amount of Depreciation will be
credited:
(A) Asset A/c (B) Provision for Depreciation A/c
() Depreciation A/c (D) Profit and Loss A/c.
ANSWERS:
1. (B) 2. (A) 3. (D) 4. (D) 5. (B) 6. (A)
7. (B) 8. (C) 9. (C) 10. (A)
11 () 12. (A) 13. (C) 14. (B) 15. (C) 16. (A) 17.(B) 18. (C) 19. (A)'
21 () 22. (C) 23. (D)
20. B)
24. (D) 25. (A) 26. (B) 27. (A) 28. (B)
31. ) 32. (C) 33. (B)
29. (D) 30. (A)
34. (A) 35. (B) 36. (D) 37. (B) 38. (D)
39, (C) 40. (B)
(B] Fillin the blanks :
1. According to ...... Depreciation may be defined as a gradual deterioration in the value of
Asset due to use.
2. Depreciation is of. (Carter/Williams/Spicer and Pegler)
(Fixed Nature/Variable Nature/None of the two)
3. Need of providing depreciation is... .(To know true financial position/To ascertain
true

Profit or Loss/Both of them)

4. Points to be considered at the time of computation of
Depreciation are.....
(Actual Cost of the Asset and Working life/Scrap value of
5. Depreciation means ..in the value of an Asset.
Asset/All of them)
6 (Decrease/Increase/Both)
Characteristics of Depreclation are..Decrease in the value of an asset of Axed nature/
wear and tear due to constant use and obsolescence/All of them)
7. With the rate of depreciation to have or not have the words P'er Annum (P.A) is
(lmportant/ Unimportant/llegal)
 8. The Depreciation is calculated....On Current Assets/On Fixed Assets/On Fictitious Assets)
9. Depreciation under fixed instalment system is calculated ...... On the reducing value of the
asset/On the purchase price of the asset/On the market value of the asset)
10. Depreciation is calculated under diminishing balance method...On the purchase
the asset/On the depreciated value of the asset/In the Ist year on the price of
purchase price of the
asset and in remaining years on diminishing balance of the asset)
11. In Fixed Instalment System, the amount of depreciation is always...
(Increases/ Decreases/ Fixed)
12. Depreciation charged on Building will be debited to
(Building A/c/Depreciation A/c/Goods A/c)
13. Depreciation of Asset for business is.....
14. The different methods of depreciation are. (Income/Expense/Liability)
(Fixed Insalment System/Diminishing Balance Method/Both of them)
15. On the closing of depreciation a/c at the end of the year the A/c is credited.
(Depreciation A/c/Asset A/c/Profit and Loss A/c)
16. On charging the depreciation at the close of the year will be credited to...
(Purchases A/c/Profit and LOSs A/c/Asset A/c)
17. According to Diminishing Balance Method depreciation 10% p.a. On 20, 000 after 3years will
be.
2,000/ ?1,800/ 1,620)
18. The Diminishing Balance Method means a method by which....... (The rate of depreciation
falls year to year/The amount on which depreciation is calculated falls year to year/The rate as
well as the amount falls year to year)
19. Maintenance of ........ is a must.) (General Reserve/Secret Reserve/Provision)
20. In case of preparing the provision for Depreciation A/c the amount of depreciation will be
credited. (Asset A/c/ Provision for Depreciation A/c/Depreciation A/)
ANSWERS:
(1)Williams ;(2) Fixed nature;(3) Both of them ; (4)All of them ;(5) Decrease ; (6) All of them;
) Important :(8) On FixedAssets ;(9) On the purchase price of the aset ;(10) In the lst year
on the purchase price of the asset and in remaining years on diminishing balance of the
asset; (11) Fixed ; (12) Depreciation A/c;(13) Expense, (14) Both of them; (i5) Depreciation
A/c; (16) Asset A/c; (17)? 1620; (18) The amount on which depreciation is calculated falls
year to year ; (19) Provision ; (20) Provision for Deperciation A/c.
(C] State whether the following statements are True or False :
1. Depreciation is a gradual deterioration in value due to use.
2. Depreciation refers to only tangible fixed assets.
3. With the passage of time, the value of assets does not decrease.
4. There is no heip to save the Income tax by providing the depreciation.
5. Itis necary to knw he actual cost of asset for providing the depreciation.
6. AS6erplains the depreciatin.
7. With the rale of depreriation to have of not have the words per annum is uninmportant.
8. Under hed stalmet Method the depreciation is calculated on the market value of the aset
9. Under Diminishing Balance Method, the depreciation is always calculated on the purchase
price of the asset.
10. In Fixed Instalment System the amount of depreciation is always equal.
11. Depreciation charged on Building will be debited to Building A/c.
12. The need for providing depreciation is for showing the true financial position of the business.
13. On closing the Depreciation A/c at the close of the year the Asset A/c is credited.
14. Depreciation is a apportionment process.
15. The main object of depreciation is to arrange the funds.
16. The loss on the sale of Machine will be debited to Profit and Loss A/c.
17. Provision is maintained for known liabilities.
18. Maintenance of secret reserve is a must.
19. Creation of provision is discretionary.
Depreciation cannot be provided in case of loss in a inancial year.
ANSWERS:
True :1,2, 5, 6, 10, 12, 14, 16, 17.
False :3, 4, 7, 8,9, 11, 13, 15, 18, 19, 20.
II One Mark Questions - With Answers
Q.1. What is Depreciation ?
Ans. Depreciation is the gradual and permanent decrease in the value of an Asset from any
cause.
Q.2. Explain two methods of providing Depreciation.
Ans. Two methods of providing depreciation are as follows : (1) Fixed
(2) Diminishing Balance System. Instalment System, and
Q.3. Explain two causes of providing Depreciation.
Ans. Two causes of providingdepreciation are as follows: (1)
to constant use. Due to expiry of time, and (2)
Due
Q.4. Explain two objects of providing Depreciation.
Ans. Two objects of providing depreciation are as follows :(1)
To
cost, and (2) To calculate the accurate Net Profit or Loss, ascertain the actual production
Q.5. Explain two points to be considered at the time of
Ans. Two points to be considered at the time of computation of Depreciation.
computation of depreciation are as follows: (1)
Actual Cost of the Asset, and (2) Estimated residual
Q.6. Explain two advantages of Fixed Instalment System. (Scrap) value of the asset.
Ans. Two advantages of Fixed Instalment System are as
(2) There is no need of calculation of follows :(1) This system is simple,and
depreciation is equal in every year depreciation every year because the anmount of
Q.7. What ls Diminishing Balance Method of providing
Ans. In Diminishing Balance Method the Depreclatlon ?
depreciation is charged on the reducing balance of the
asset every year at the fixed rate.
Q. 8. Explain two disadvantages of Diminishing Balance method.
Ans. Two disadvantages of Diminishing Balance Method are as follows :(1) Asset cannot be
written offto zero, and (2) High rate of providing depreciation.
Q.9. Explain one point of difference between Fixed Instalment System and Diminishing
Balance System.
Ans. In Fixed Instalment System equaldepreciation is charged every year while in Diminishing
Balance Method deprciation goes on decreasing year after year.
Q. 10. Which account will bedebited by the depreciation provided on Building ?
Ans. Depreciation provided on building will be debited to depreciation account itself.
Q.11. What is the scrap (residual)value of an Asset ?
Ans. It is the estimated sale value of the asset at the end of its useful life.
Q.12. What is Fixed Instalment System of providing depreciation ?
Ans. Under this method depreciation is charged at a fixed percentage on the original cost of
asset. The amount of depreciation remains equal from year to year.
Q. 13. Which account willbe credited by the depreciation provided on a Machine ?
Ans. The depreiation provided on a machine will be credited to Machine A/c itself.
Q. 14. Explain two points of advantages of Diminishing Balance Method.
Ans. Two advantages of Diminishing Balance Method are as follows : (1) This method is
approved by Income Tax Authorities, and (2) Computation of depreciation iseasy.
Q.15 Explain two points of disadvantages of Fixed Instalment System.
Ans. Two points of disadvantages of Fixed Instalment System are as follows :(1) It ignores the
interest factor on invested capital, and (2) Difficulty in computation of depreciation in
case of many machines.

Short Answer Questions

1. What is meant by Depreciation ?
2. Give two definitions of Depreciation.
3. Describe the main cbjects of providing the Depreciation.
4. Explain the main causes of providing Depreciation on an Asset.
5. Explain the two methods of providing Depreciation with examples.
6. Explain the difference between Fixed Instalment System' and 'Reducing Instalment System.
7. Explain the factors which should be kept in mind at the time of fixing the amount of
Depreciatians.
IV Long Answer Questione
1. What are the objects of making provisions for the depreciation on the fixed assets in a
business?
2. Briefly descrbe the various methods of providing depreciation n fixed assets, stating the
ircumstances in which each of the nethod can be appropriately applied.
 3. What are the differences between Fixed Instalment System and Reducing Balance Method of
Depreciation ? In what circumstances the Reducing Balance Method is more suitable in
comparison tothe first method ?
[Hint- For 2nd part of the Question - Prove reducing balance method is more suitable in
comparison to the original cost method because of several advantages available in
this system.]
VHigher Order Thinking Skills (HOTS) Based Questions / With Answers
1. Name the method of depreciation in which more depreciation is provided in initialyears.
[Ans. Diminishing Balance Method)
2. Depreciation is taken a non-cash expenditure why?
[Ans. Depreciation is taken as anon-cash expenditure because no payment is made for
depreciation.]
3. Original cost of a Machinery is 8,00,000 and its scrap value is ? 50,000. Its expected working
life is 10 years. What will be the amount of depreciation for the 3rd year according to original
cost method ?

[Ans.Depreciation =
? 8,00,000 - 50,000 =75,000 each year.]
10years
4. Oniginal cost of aMachinery is 6,50,000, its scrap value is 40,000. What willbe the amount
of Depreciation for the second year according to Diminishing Balance Method @10% pa. ?
[Ans. Depreciation for the lst year = ?6,50,000x 10 =65,000
100

Depreciation for 2nd year = (R6,50, 000 -65, 000 )x 10 =58,500.]

100
VI Value Based Questions With Answers
0.1. What value is involved in charging depreciation in a year of
loss ?
Ans. Depreciation is charged on an asset
in a year of loss because depreciation is a charge on
profits.
0.2 Why generallyno provision is made for depreciation on Land ?
Ans. Generally depreciation is not charged on Land because its useful life is
years. not fxed for limited
Q.3. Why depreciation is provided on fixed assets ?
Ans. Depreciation isprovided on fixed assets because its value
0.4. Even if an asset i_ not used during the current
decreases year by year.
year, why provision for depreciation is
made on it?
Ans. Even if an asset is not used during the current year, provision for
because value of an asset decreases by passing of time. depreciation is made