Unit 5: Depreciation, provisions, and reserves:
### 1. What is the main purpose of the matching principle in accounting?
- A) To recognize revenue in the year it is received
- B) To match revenue of a given period with expenses of the same period
- C) To prevent any depreciation from being charged
- D) To ensure assets are recorded at market value
- **Answer:** B) To match revenue of a given period with expenses of the same period
### 2. Depreciation is best described as:
- A) A non-cash expense related to the reduction in value of fixed assets over time
- B) The increase in value of an asset over time
- C) The total cost of an asset
- D) A current asset on the balance sheet
- **Answer:** A) A non-cash expense related to the reduction in value of fixed assets over time
### 3. Which of the following is NOT a cause of depreciation?
- A) Wear and tear due to use
- B) Expiration of legal rights
- C) Appreciation of asset value
- D) Obsolescence
- **Answer:** C) Appreciation of asset value.
### 4. What is the key difference between depletion and depreciation?
- A) Depreciation applies to physical assets only, while depletion applies to intangible assets
- B) Depreciation involves wear and tear, whereas depletion concerns the exhaustion of natural resources
- C) Depreciation applies only to assets held for more than five years
- D) Depletion is a gradual process, while depreciation happens instantly
- **Answer:** B) Depreciation involves wear and tear, whereas depletion concerns the exhaustion of natural resources.
### 5. Under the straight-line method, the annual depreciation expense:
- A) Varies every year
- B) Remains the same each year over the asset’s useful life
- C) Decreases each year
- D) Increases each year
- **Answer:** B) Remains the same each year over the asset’s useful life
### 6. Which term is used when the cost of intangible assets, like patents, is written off over time?
- A) Depreciation
- B) Depletion
- C) Amortisation
- D) Provision
- **Answer:** C) Amortisation.
### 7. According to Accounting Standard-6, depreciation includes:
- A) Reduction in fair market value only
- B) Only wear and tear due to physical use
- C) A measure of wear, consumption, or loss of value over an asset’s useful life
- D) Appreciation of asset value over time
- **Answer:** C) A measure of wear, consumption, or loss of value over an asset’s useful life.
### 8. What is the depreciation rate under the straight-line method if an asset's cost is ₹200,000, with an estimated residual value of ₹50,000 and a useful life of 10 years?
- A) 5%
- B) 10%
- C) 8%
- D) 12%
- **Answer:** A) 5% (Calculated as: ₹200,000 - ₹50,000 = ₹150,000 / 10 years = ₹15,000 per year; rate = (₹15,000/₹200,000) * 100 = 5%)
### 9. Which of the following is NOT an advantage of the written down value (WDV) method?
- A) It allows for higher depreciation in earlier years
- B) It aligns with income tax laws
- C) It keeps the depreciation amount constant each year
- D) It reduces the impact of obsolescence on the balance sheet
- **Answer:** C) It keeps the depreciation amount constant each year
### 10. Under the straight-line method, depreciation is calculated based on:
- A) The written-down value of the asset
- B) The market value of the asset
- C) The original cost of the asset
- D) The residual value at the end of the asset's life
- **Answer:** C) The original cost of the asset.
### 11. Which accounting method is used to record depreciation when the asset account remains at its original cost?
- A) Straight-line method
- B) Written down value method
- C) Creating a Provision for Depreciation Account
- D) Charging Depreciation to Asset Account
- **Answer:** C) Creating a Provision for Depreciation Account
### 12. What is a key feature of the straight-line method?
- A) Depreciation amount varies annually
- B) Depreciation rate decreases with time
- C) The asset value is reduced to zero over its useful life
- D) The method applies only to intangible assets
- **Answer:** C) The asset value is reduced to zero over its useful life.
### 13. Which factor does NOT directly affect the calculation of depreciation?
- A) Useful life of the asset
- B) Cost of the asset
- C) Maintenance policy of the business
- D) Market demand for the asset
- **Answer:** D) Market demand for the asset
### 14. Which method of depreciation is NOT recognized by the Income Tax Law in India?
- A) Straight-line method
- B) Written down value method
- C) Units of Production method
- D) Double declining method
- **Answer:** A) Straight-line method
### 15. When calculating depreciation, the 'salvage value' refers to:
- A) The cost to repair an asset
- B) The residual value of an asset at the end of its useful life
- C) The book value at the beginning of each period
- D) The replacement cost of the asset
- **Answer:** B) The residual value of an asset at the end of its useful life
### 16. Depreciation must be recorded to fulfill which accounting principle?
- A) Cost principle
- B) Conservatism principle
- C) Matching principle
- D) Revenue recognition principle
- **Answer:** C) Matching principle.
### 17. Which of the following is NOT a method for calculating depreciation?
- A) Sum-of-the-years-digits method
- B) Reducing balance method
- C) Variable cost method
- D) Annuity method
- **Answer:** C) Variable cost method
### 18. Under the written down value (WDV) method, depreciation is calculated based on:
- A) The original cost of the asset
- B) The residual value at the end of the asset’s life
- C) The book value of the asset at the beginning of each year
- D) The market value of the asset
- **Answer:** C) The book value of the asset at the beginning of each year
### 19. Depreciation due to obsolescence occurs mainly because of:
- A) Wear and tear of the asset
- B) Increase in asset value over time
- C) Technological advancements and market changes
- D) Maintenance policies of the business
- **Answer:** C) Technological advancements and market changes
### 20. Which of the following best describes “depletion” in accounting?
- A) A reduction in value due to asset wear and tear
- B) Reduction in value due to the use of natural resources
- C) Amortisation of intangible assets
- D) Increase in value of assets over time
- **Answer:** B) Reduction in value due to the use of natural resources
### 21. Depreciation is considered a non-cash expense because:
- A) It does not involve a cash outflow
- B) It increases the book value of assets
- C) It represents an increase in revenue
- D) It is only recorded on cash purchases
- **Answer:** A) It does not involve a cash outflow.
### 22. When legal rights expire, which type of depreciation cause is applicable?
- A) Wear and tear
- B) Obsolescence
- C) Expiration of legal rights
- D) Depletion
- **Answer:** C) Expiration of legal rights.
### 23. Which of the following factors is most relevant when estimating the useful life of an asset?
- A) Market value at purchase
- B) Expected period of economic benefit
- C) Resale value after use
- D) Cash flow generated by the asset
- **Answer:** B) Expected period of economic benefit.
### 24. The straight-line depreciation method is most suitable for assets that:
- A) Require high maintenance
- B) Experience consistent usage and wear over time
- C) Are affected by rapid technological changes
- D) Have unpredictable market values
- **Answer:** B) Experience consistent usage and wear over time
### 25. An asset’s book value is calculated by:
- A) Adding the total depreciation to the original cost
- B) Subtracting accumulated depreciation from the original cost
- C) Multiplying the market rate with the asset's residual value
- D) Taking the average cost over the useful life
- **Answer:** B) Subtracting accumulated depreciation from the original cost.
### 26. Which of the following statements is true regarding provision for depreciation?
- A) It is recorded in the asset account only
- B) It helps maintain the original cost of the asset on the balance sheet
- C) It is recorded on the liabilities side only
- D) It is optional for businesses to create
- **Answer:** B) It helps maintain the original cost of the asset on the balance sheet
### 27. What is the primary benefit of using the written down value (WDV) method for depreciation?
- A) Consistent depreciation charges every year
- B) Higher depreciation expenses in the early years
- C) Lower repair and maintenance costs
- D) Avoids the need for salvage value estimation
- **Answer:** B) Higher depreciation expenses in the early years.
### 28. Which method of depreciation is recommended for assets with a high likelihood of obsolescence?
- A) Straight-line method
- B) Written down value method
- C) Sum-of-the-years-digits method
- D) Annuity method
- **Answer:** B) Written down value method
### 29. If an asset costs ₹50,000, has a useful life of 5 years, and a residual value of ₹5,000, the annual depreciation under the straight-line method would be:
- A) ₹10,000
- B) ₹9,000
- C) ₹8,000
- D) ₹7,500
- **Answer:** B) ₹9,000 (Calculation: (₹50,000 - ₹5,000) / 5 years = ₹9,000)
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