Assignment No. 5 Chapter No.

Depreciation
The gradual decrease in the value of fixed asset due to business use and wear and tear is called
depreciation.

Methods of charging depreciation:

1. Fixed Installment / Original Cost / Straight line method :

Formula of Depreciation = Cost X Depreciation Rate
2. Reducing Balance Method / Written down value / Diminishing balance method:
Formula of Depreciation = Book value X Depreciation Rate
Book value = cost – accumulated depreciation
3. Formula of depreciation if method is fixed installment but rate of depreciation is not
given and working life of asset is given:
Depreciation = Cost - Residual value ÷ Expected Life

Format of Asset Account:

Dr. Asset A/c Cr.
Date Details Rs. Date Details Rs.
Increase in asset XXX Decrease in asset (Dep) XXX

Balance Figure XXX

Total XXX XXX

MCQS:
Choose the appropriate Answer.

1. What is depreciation?
(a) An expense (b) A liability (c) A revenue (d) A profit.
2. What is the decline in the value of an asset proportionate to the quantum of its production
e.g mine, quarry etc called?
(a) Amortization (b) Depletion (c) Depreciation (d) Wear and tear.
3. Depreciation is recorded on the:
(a ) Debit side of Trading Account (b) Credit side of Trading Account (c) Debit side of
profit and loss Account (d) Credit side of profit and loss Account.
4. In a fixed installment method, depreciation is calculated on,
(a) Book value (b) Market price (c) Scrap value (d) Original cost
5. If original cost of asset is Rs.45000, scrap value is Rs.3000, estimated life is 7 years, then
the annual value of depreciation will be:
(a) Rs.6000 (b) Rs.7000 (c) Rs.6500 (d) Rs.8000
6. The value of an asset at the end of working life is called:
 (a) Original cost (b) Book value (c) Scrap value (d) Market value
7. The term depreciation is used with reference to:
(a) Tangible assets (b) Intangible assets (c) Current assets (d) Fixed assets
8. Depreciation arises because of:
(a) Fall in the market value of an asset (b) Physical wear and tear (c) Fall in the value of
money (d) Increase in the value of money
9. Under straight line method, the amount of depreciation is:
(a) Decreases every year (b) Increases every year (c) Both “A” and “B”(d)
Constant every year.
10. Reducing balance method is also known as:
(a) Diminishing balance method (b) Book value Method (c) Written down value
method (d) All of these.
11. If original cost of the asset is Rs 10,000, Rate of Depreciation is 10%. Then valve of
depreciation in Diminishing balance method after third year will be?
(a) Rs 1000 (b) Rs 900 (c) Rs 700 (d) Rs 810.
12. Loss on the sale of machinery should be written off against:
(a) Machinery a/c (b) Sales a/c (c) Depreciation fund a/c (d) Scrape a/c.
13. Depreciation arises because of:
(a) Fall in the market value of an asset
(b) Damage during work
(c) Physical wear and tear
(d) Fall in the market value of money.
14. The value of asset after its useful life is called:
(a) Replacement value (b) Resale value (c) Residual value (d) Market value.
15. Depreciation is charged against:
(a) Expense (b) Revenue (c) Liability (d) Capital
16. Depreciation occurs:
(a) Up to one year (c) Up to two years
(b) Till the last day of the estimated life of asset (d) Up to the replacement of old
asset.
17. Written down value method is suitable for those asset which have
A) Long life b) Short Life c) Average Life d) Temporary life
18. Which one of the following is wasting asset
a) Land b) Goodwill c) Mines d) Patent
19. Due to fluctuation in market price the value of an asset may
a) Increase b) Decrease c) Both a & b d) Not change
20. We should deduct the amount of depreciation from
a) Capital b) Fixed asset c) Cash d) Liability
Short Questions:
1. Difference between depreciation and fluctuation.
2. Write five characteristics of depreciation.
3. What is meant by specific reserve and general reserve?
4. What is Scrap value and what is the formula of depreciation when scrap value is given?
5. What is meant by obsolescence?
6. What is the journal entry for depreciation?
7. What are the causes of external and internal depreciation?
8. Write three points for the ascertainment of the amount or rate of depreciation?
9. Define depletion and amortization.
10. What do mean by reserve and provision?

Long Questions:
Q no.1
A transport company purchases 10 trucks at Rs. 90,000 each on 1st April 2002. on 1st October,
2004 one of the trucks got an accident and was completely destroyed. Rs 54,000 are received
from the insurance company in full settlement. On the same date company purchased another
truck for Rs. 100,000. The company wrote off depreciation at 20% on the original cost per
annum, accounts are closed on every 31st December.
Give the motor truck account from 2002 to 2004.

Q no.2
A & Co. purchased a machinery for Rs. 160,000 on 1st July 2001. The books are closed on
31stDecember every year. On 30th June, 2004, it was sold for Rs. 80,000 and new machinery was
purchased for Rs. 180,000 on the same date. Depreciation is charged at the rate of 15% p.a. on
diminishing balance method.

Required:Prepare a machinery account upto 2004 in the books of company.

Past Paper Short questions:

1. Write five characteristics of depreciation. (2016)
2. What is meant by specific reserve and general reserve? (2016)
3. What is Scrap value and what is the formula of depreciation when scrap value is given?
4. What is meant by obsolescence? (2017)
5. What are the causes of external and internal depreciation? (2015) (2016) (2019)
6. Define depletion and amortization. (2014)
7. What do mean by reserve and provision? (2015) (2016)

Past Paper long questions:

Q No.1 (2014)
On 1st January 2001 a firm purchased machinery worth of Rs. 50,000/-. On 1st July 2003 it buys
additional machinery worth Rs. 10,000/- and spends Rs. 1,000/- on its erection. The accounts are
closed each year on 31st Dec. assuming the normal depreciation to be 10% per annum.
Show the machinery account for four years under fixed installment method.
Q No.2 (2015)
A transport company purchased 10 motor trucks at Rs. 90,000 each, on 1st April 2002. On 1st
October 2004 one of the truck got an accident and was completely destroyed. Rs. 54000 are
received from the insurer in full settlement. On the same day another truck was purchased for the
sum of Rs. 100,000. The company wrote off depreciation @ 20% on the original cost per annum
and observed the calendar year as its financial year.
Give the motor truck account from 2002 to 2004.

Q No.3 (2017)
Zahid & Co. purchased a machinery for Rs.160,000 on 1st July 2010. The books are closed on
31st December every year. On 30th June 2013, it was sold for Rs.70,000 and new machinery was
purchased for Rs 180,000 on the same date. Depreciation is charged at the rate of 15% p.a. on
original cost method.
Requirement: Prepare the machinery account up to 2013 in the books of company.

Q No.4 (2019)
A company purchased a second hand machine for Rs.8000 on 1st April 2013. They spent
Rs.3500/- on its overhauling and installation. Depreciation is written off at 10% of the original
cost.
On 30th June 2016 the machine was found to be unsuitable and was sold for Rs.6500/-.
Prepare the machine account from 2013 to 2016, assuming that the accounts were closed on
31st December every year.
Q No.1 (2014)
On 1st January 2001 a firm purchased machinery worth of Rs. 50,000/-. On 1st July 2003 it buys
additional machinery worth Rs. 10,000/- and spends Rs. 1,000/- on its erection. The accounts are
closed each year on 31st Dec. assuming the normal depreciation to be 10% per annum.
Show the machinery account for four years under fixed installment method.

Machinery A/c
Date Details Rs Date Details Rs
1-1-01 Cash a/c 50000 31-12-01 Dep ( 50000 x 10%) 5000
Balance c/d 45000
50000 50000
1-1-02 Balance b/d 45000 31-12-02 Dep (50000 x 10%) 5000
Balance c/d 40000
45000 45000
1-1-03 Balance b/d 40000 31-12-03 Dep M1 (50000 x 10%) 5000
1-7-03 Cash (10000 + 1000) 11000 Dep M2 (11000 x 10% x 6/12) 550
Balance c/d 45450
51000 51000
1-1-04 Balance b/d 45450 31-12-04 Dep M1 ( 50000 x 10%) 5000
Dep M2 (11000 x 10%) 1100
Balance c/d 39350
45450 45450
Q No.2 (2015)

A transport company purchased 10 motor trucks at Rs. 90,000 each, on 1st April 2002. On 1st
October 2004 one of the trucks got an accident and was completely destroyed. Rs. 54000 are
received from the insurer in full settlement. On the same day another truck was purchased for
the sum of Rs. 100,000. The company wrote off depreciation @ 20% on the original cost per
annum and observed the calendar year as its financial year.
Give the motor truck account from 2002 to 2004.

Truck Account
Date Details Rs Date Details Rs
1-4-02 Cash (90000 x 10) 900000 31-12-02 Dep (900000 x 20% x 9/12) 135000
Balance c/d 765000
900000 900000
1-1-03 Balance b/d 765000 31-12-03 Dep (900000 x 20%) 180000
Balance c/d 585000
765000 765000
1-1-04 Balance b/d 585000 1-10-04 Dep Destroyed truck
1-10-04 Cash 100000 (90000 x 20% x 9/12) 13500
Cash (insurance) 45000
31-12-04 Dep old truck (810000 x 162000
20%)
Dep new truck
(100000 x 20% x 3/12) 5000
Balance c/d 459500
685000 685000

Book value of destroyed truck = cost – accumulated depreciation

90000 – 13500 – 18000 – 13500 = 45000
Book value = 45000
Cash (insurance) = 54000
Profit = 9000 Cash 54000
To Truck 45000
To capital profit 9000