Depreciation, Reserve & Provision MCQ Quiz in தமிழ் - Objective Question with Answer for Depreciation, Reserve & Provision - இலவச PDF ஐப் பதிவிறக்கவும்

The correct answer is Depreciation is the process of allocation of the cost of a fixed asset.

Key Points

• Depreciation is the cost that is allocated to a fixed asset over its useful life. In other words, the cost of the asset is spread over the useful life.
• Contrary to popular belief, depreciation is not used to gradually "expense" an asset, as is commonly believed.
• Depreciation is a cost that is distributed over the life of an asset and is recorded as an expense on the income statement, but it is not an expense of the asset.

Important Points

1. Depreciation: Depreciation is defined as “the systematic allocation of the depreciable amount of an asset over its useful life.” In other words, depreciation is simply a process of allocation and not of valuation. Depreciation is the portion of the cost or other amount substituted for cost allocated or charged as expense during an accounting period. Hence, "Depreciation is the process of allocation of the cost of a fixed asset", this statement is correct.
2. Land is a depreciable asset, this statement is false because land is regarded to have an infinite useful life, it is not depreciated. Land is the only asset type for which depreciation is prohibited, which differentiates it from all other asset kinds.
3. Depreciation cannot be provided in case of loss in a financial year, this statement is false because whether a financial year ends in profit or loss, depreciation must be anticipated for since it is a charge against profit. The business will show a lower loss and a higher asset value if depreciation is not charged.
4. Depreciation is a cash expenditure like other normal expenses, this statement is false because on the income statement, depreciation is listed as an operating expense. It lowers taxable income reported by a business because it is a cost, but Depreciation is a non-cash item, though, so bear that in mind.

Hence, it can be concluded that "Depreciation is the process of allocation of the cost of a fixed asset." is true.

The correct answer is 72,000

Key Points

• Depreciation: The fall in the monetary value of an asset due to its constant use, wear, and tear, obsolescence is termed as Depreciation. It is considered a yearly non-cash expense of a company.
• Depreciation in accounting only involves the allocation of cost of the asset as revenue during the useful life of the asset. Depreciation represents how much of an asset's value has been used over the years of its life. 

Important Points

• Purchase Price = Sale Price + Loss + Depreciation
• Purchase Price = 55000 + 5000 + 12000 
• Purchase Price = Rs. 72000

The correct answer is Creation of reserves is discretionary.

Key PointsThe provision means to set aside some funds for a known liability that is probable to happen after a specific period of time. A portion of the profit must be retained by the Reserve for any foreseeable future use.

Important PointsMajor Difference between Provision and Reserve

1. The Provision means to provide for a future expected liability whereas Reserves means to retain a part of profit for future use.
2. Provision is charge against profit whereas Reserve is an appropriation of profit.
3. The creation of a provision is compulsory against the anticipated liability. Conversely, the creation of reserves is voluntary except in the case of Capital Redemption Reserve (CRR), and Debenture Redemption Reserve (DRR).
4. Creation of provision reduces the taxable profit of the business, the creation of provisions reduces the amount of net profit. Hence, it reduces taxable profits. The creation of a reserve reduces the divisible profits but not the net profit.
5. The use of provision is specific, i.e. it must be used for which it is created. On the other hand, reserves can be used otherwise.
6. Provisions are deducted from the concerned asset when it is created against an asset while shown as a liability on the balance sheet when it is created against liability. As opposed to Reserves, which are shown on the liabilities side.
7. It is immaterial for the creation of provision, whether the company earned the profit or not whereas Creation of reserves is discretionary, the company must earn the profit for the creation of reserves.

​Hence, it can be concluded that "Creation of reserves is discretionary", this statement is correct.

Key Points

Depreciation: The monetary value of an asset decreases over time due to use, wear, and tear, or obsolescence. Accounting estimates the decrease in value using the information regarding the useful life of the asset.

Sinking Fund Method:

• The sinking fund method is a technique that depreciates an asset while generating enough money to replace it at the end of its useful life.
• Since depreciation is charged to reflect the declining value of the asset, a matching amount of cash is invested.
• These funds sit in a sinking fund account and generate interest.
• The sinking fund method is a depreciation technique used to finance the replacement of an asset at the end of its useful life. As depreciation is incurred, a matching amount of cash is invested, usually in government-backed securities.

Calculating Depreciation under Sinking Fund method:

Reference to sinking fund table =  0.180975

The amount to be charged to the Profit and Loss account = 20,000* 0.180975 = 3619.5

Therefore, Depreciation incurred = Rs. 3619.5

Given: Machinery costs Rs. 30,000. Scrap value Rs. 10,000. Life 5 years. Rate of interest 5%. Reference to sinking fund table 0.180975. The depreciation per year will be Rs. 3619.50

The correct answer is 9.5 percent.

Key Points

• The value of an asset is uniformly decreased over each period with the straight line depreciation method until it reaches its salvage value.
• The most popular and simple depreciation method for dividing up the cost of a capital asset is straight line depreciation.
• It is determined by merely dividing the asset's cost, less its salvage value, by its usable life.

 Important Points The straight line depreciation formula for an asset is as follows:

Annual Depreciation Expense = (Cost of an Assets - Salvage Value)/Useful Life of the Assets

Where:

• Cost of the asset is the purchase price of the asset
• Salvage value is the value of the asset at the end of its useful life
• Useful life of asset represents the number of periods/years in which the asset is expected to be used by the company 

Additionally, the straight line depreciation rate can be calculated as follows:

Straight Line Depreciation = Annual Depreciation Expense/Cost of Asset

As per the given question,

• Cost of Assets = 7,80,000 + 60,000 = 8,40,000
• Salvage Value = 42,000
• Useful Life of Assets = 10
• Annual Depreciation Expense = (8,40,000 - 42,000)/10 = 79,800.
• Straight Line Depreciation Rate = (79,800/ (8,40,000)
• Straight Line Depreciation Rate = 79,800/8,40,000 x 100 = 9.5%.

Hence, it can be concluded that rate of depreciation according to straight line method is 9.5%.

The correct answer is ₹70,000

Key Points

• Depreciation: It means a decline in the value of fixed assets due to use, the passage of time, or obsolescence or diminution in the intrinsic value of the asset due to use and/or lapse of time.

Important Points

Calculation of depreciation: 

1. Depreciation on Plant & Machinery = ₹2,00,000*20% = ₹40,000
2. Depreciation on Furniture = ₹50,000*10% = ₹5,000
3. Depreciation on Building = ₹5,00,000*5%= ₹25,000
4. Total Depreciation = 40,000+5,000+25,000= ₹70,000

The correct answer is Rs. 9,000.

Key Points

• Calculation of the depreciation:
  • Determine the useful life of the asset. In this case, it's given as 4 years.
  • Find the sum of the year's digits: 4+3+2+1 = 10.
  • Determine the depreciable base, which is the purchase price - salvage value. In this case, it's Rs. 1,00,000 - Rs. 10,000 = Rs. 90,000.
  • Depreciation for each year will then be determined by multiplying the ratio of years (in reverse order) to the sum of the year's digits by the depreciable base.
  • For the year ended 31 December 2023, it is the 4th year of use, so:
  • Depreciation = (1/10) * Rs. 90,000 = Rs. 9,000.
• So, the depreciation for the year ended 31 December 2023 according to the SYD method would be Rs. 9,000.

The correct answer is Long term loan capital.

Key Points Depreciation:

• The cost of a depreciation fund is computed as the amount of money that must be set aside each year in order to replace an asset at the end of its useful life.
• This is typically done for assets that have a finite useful life and will eventually need to be replaced, such as machinery, vehicles, and buildings.
• The cost of a depreciation fund is based on several factors, including the original cost of the asset, its estimated useful life, and its estimated salvage value (the amount that the asset can be sold for at the end of its useful life).
• The cost of the depreciation fund is then calculated using various methods, such as straight-line depreciation, declining-balance depreciation, or sum-of-the-years'-digits depreciation.

Hence, the correct answer is Long term loan capital.

The correct answer is Show true financial position in the Balance Sheet

Key PointsDepreciation - A continuing, permanent, and steady decline in the book value of fixed assets is referred to as depreciation.

 Important Points

• The main objective of providing depreciation is to show the true financial position in the Balance Sheet.
• Depreciation is the systematic allocation of the cost of a tangible asset over its useful life.
• By recognizing the reduction in value of an asset over time, depreciation allows a company to accurately reflect the decrease in the asset's value in its financial statements.
• This in turn helps to provide a more accurate picture of the company's financial position and performance.
• While reducing tax burden, making provision to purchase new assets, and complying with legal requirements may be secondary benefits of depreciation, the primary objective is to reflect the decrease in the value of assets over time in a company's financial statements.

Key Points

• The opening stock appears on the debit side of trading account and to reduce it to its cost the stock reserve is transferred to the credit side.
• The closing stock assumed to be out of the goods of this year and the profit element at the rate of G.P. of current year.

Important PointsStock Reserve:

• Stock Reserve or buffer stock is a stock quantity which is based on the normal average expected consumption during the lead-time to replenish depleted stock.
• Similarly, closing stock and opening stock for the next year are to be brought down to their actual costs by reducing it with the value of ‘load’.
• This excess amount in case of closing stock and opening stock is known as ‘Stock Reserve’ which is nothing but the invoice price reduced from actual cost.
• Reserve stock allows you to manage stock that you have allocated to a job that is Work In Progress. When you allocate a product to an open job, the quantity reserved will be updated (increased) so you have an accurate view of your true stock available.
• To eliminate the profit earned by the two divisions or units of the same company while transacting between themselves, the stock reserve is created. The purpose of stock reserve is to eliminate unrealised profit in unsold inventory held by a department at the end of the financial year.