Practice Questions

Define a 'Provision' in the context of accounting.

Examine the primary advantage of creating a Provision for Depreciation Account instead of directly crediting the asset account.

Analyze why depreciation is classified as a non-cash expense.

Solve for the annual depreciation amount and the rate of depreciation using the Straight Line Method for an asset costing ₹1,50,000, with an estimated useful life of 10 years and a net residual value of ₹30,000.

Evaluate whether a 'Provision for Discount on Debtors' is a charge against profit or an appropriation of profit.

Define the term 'Depreciation' as an accounting concept.

A company acquires a software license for ₹8,00,000 with a useful life of 8 years. Calculate the annual charge against profit using the straight-line basis and state the correct accounting term for this process.

Name the two methods of recording depreciation transactions in the books of account.

List four primary causes of depreciation mentioned in the source material.

Critique the argument that if an asset's market value increases, no depreciation should be charged.

Describe the three main factors that are considered to determine the annual amount of depreciation for an asset.

Explain the primary purpose of creating 'Reserves' in a business.

Define a 'Secret Reserve' and identify one way it can be created.

Explain the concepts of 'General Reserve' and 'Specific Reserve'.

Recall the meaning of 'Cost of Asset' for depreciation purposes.

Describe the 'Written Down Value Method' of calculating depreciation.

Examine how charging excessive depreciation can lead to the creation of a secret reserve.

Compare the total charge against the Profit and Loss Account over an asset's life under the Straight Line Method versus the Written Down Value Method, considering both depreciation and repair expenses.

A company buys a machine for ₹4,00,000 and spends ₹50,000 on its installation. The estimated scrap value after a useful life of 5 years is ₹50,000. Calculate the amount of depreciation for the first two years using the Written Down Value method at a rate of 20% per annum.

Create a definition for a secret reserve that highlights its primary conflict with the principle of 'True and Fair View'.

Explain the difference between a Revenue Reserve and a Capital Reserve based on their source of creation.

Examine the accounting treatment for an addition to an existing asset that becomes an integral part of it, versus an addition that retains a separate identity.

Analyze the impact on a company's reported profit and financial position if it fails to provide for depreciation.

Justify the classification of 'Premium on issue of shares' as a Capital Reserve rather than a Revenue Reserve.

Formulate a rule to distinguish between a capital expenditure (for example, an extension to an asset) and a revenue expenditure (for example, routine maintenance) and explain its impact on the calculation of depreciation.

Critique the management's decision to use a General Reserve to declare dividends in a year when the company incurred a significant operating loss. Is this practice financially sound?

Propose a change in the method of recording depreciation from charging it directly to the asset account to creating a 'Provision for Depreciation Account'. Justify the benefits of your proposal.

Create a journal entry to record the disposal of a machine that had an original cost of ₹50,000 and accumulated depreciation of ₹40,000, and was sold for ₹12,000. Formulate an explanation for the entry.

Explain the difference between 'Depletion' and 'Amortisation'.

Contrast a Provision for Doubtful Debts with a General Reserve based on their purpose and effect on taxable profits.

A startup company with limited initial profits is deciding on a depreciation policy for its new IT equipment, which is prone to rapid obsolescence. Propose a depreciation method and justify your choice.

Apply the matching principle to justify the need for charging depreciation on fixed assets.

Compare and contrast the two methods of recording depreciation: (a) charging depreciation directly to the asset account, and (b) creating a provision for depreciation account. Explain the difference in Balance Sheet presentation for each method.

A company consistently undervalues its closing stock to create a secret reserve. Justify why this practice, despite potentially being prudent, violates fundamental accounting principles.

Formulate a policy for a business to distinguish between a provision and a reserve, and create one example for each to illustrate the policy.

Analyze the key differences between a Revenue Reserve and a Capital Reserve, providing two examples for each and explaining their utilization.

List five key differences between a Provision and a Reserve.

Evaluate the necessity of creating a 'Provision for Repairs and Renewals' account instead of just charging actual repair costs to the Profit and Loss account as they are incurred.

Evaluate the statement: 'The Written Down Value method of depreciation is superior to the Straight Line Method for all types of fixed assets because it aligns the total charge (depreciation plus repairs) more evenly over the asset's life.'

Summarize the need for charging depreciation in accounting records, providing at least four reasons.

Design an accounting policy for a transport company regarding depreciation on its fleet of vehicles. The policy should address the choice of depreciation method, the treatment of major overhauls, and the procedure for accounting for the disposal of old vehicles.

A company charges depreciation on its freehold land and building as a single unit using the straight-line method. Justify why this accounting treatment is incorrect and propose a more appropriate method.

A company purchased machinery for ₹6,00,000. It provides depreciation at 10% per annum using the Straight Line Method and maintains a Provision for Depreciation Account. After three years, the machine was sold for ₹4,00,000. Demonstrate the preparation of a Machinery Disposal Account and calculate the profit or loss on the sale.

Summarize the key differences between the Straight Line Method and the Written Down Value Method of depreciation.

A business owns two assets: (A) a heavy-duty manufacturing plant that requires increasing repair expenditure as it gets older, and (B) a leasehold office building with a 20-year lease. Analyze which method of depreciation, Straight Line or Written Down Value, is more suitable for each asset and justify your choice.