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Correct option is (a) Capital

Correct option is (b) Time

For finding out the depreciation according to straight-line method, following three points should be kept in mind :

1. Cost price of the asset,
2. Scrap value of the asset and
3. Number of years of useful life.

Correct option is (a) Straight-line method

Under Reducing Balance Method, annual amount of depreciation reduces every year.

Here, the scrap value of the asset is deducted from the cost price. Then, that amount is divided by the number of years of estimated useful life of the asset. The figure so arrived is the annual depreciation under equal instalment method. This method is also known as straight-line method or fixed instalment method. Under this method, the amount of annual depreciation remains identical.

Procedure to determine the amount of depreciation:

This is very simple and widely used (popular) method to determine the amount of depreciation. The annual amount of depreciation can be obtained with the help of the following formula :
(1) Annual Depreciation D = C − S / N
(2) Annual Depreciation D = C × R / 100
Where, D = Depreciation
C = Cost price
S = Scrap value
N = Total number of years of useful life
R = Rate of depreciation

Features :

• Depreciation is calculated on the cost price of the asset.
• The amount of depreciation for each year remains equal.
• The graph of depreciation of each year remains in horizontal line.
• The depreciation amount is/fixed every year.

Advantages:

1. It is an easy method to understand.
2. The method of calculating depreciation is easy.
3. As the depreciation amount is the same every year, it is not required to be calculated repeatedly.
4. At the end of the useful life, the value of the asset becomes zero or equal to its scrap value.

Disadvantages:

• The amount of depreciation remains the same every year till the end of its useful life, whereas the repairs go on increasing as the asset becomes older.
• This method becomes complicated in case of assets which are frequently purchased and sold.
• This method does not consider the interest on capital blocked up in the asset.
• Here, no sufficient provision is made for the replacement of the asset.
• A proper balance cannot be maintained between the depreciation and the repairing expenses because in the initial years, the repairing expenses are less.
• While taking depreciation, only time factor is taken into consideration, e.g., the depreciation on the machines used in one shift is the same as the machines used in two shifts.

Meaning: Depreciation is calculated on the fixed tangible asset of a business, so such assets are known as depreciable assets. There is reduction in value of some assets due to their limited life, they are also called as depreciable assets.

Explanation: In normal circumstances, the following explanation can be given for depreciable assets :

1. An asset which has limited life, such asset is called as depreciable asset, e.g., Furniture, Machine, Vehicles, etc. But asset which has unlimited life, this kind of asset is not considered as depreciable asset, e.g., Land.
2. An asset which is purchased for the purpose of business use, it means, which is not purchased for sale, such asset is called as depreciable asset, e.g., Furniture and fixtures, A.C. machine, Motor-car, etc.
3. An asset which is used for more than one accounting year, such asset is called as depreciable asset.

List of depreciable assets: The list of depreciable assets is as follows :

• Plant and Machines;
• Furniture and fixtures;
• Building;
• Leasehold properties;
• Vehicles;
• Goodwill, Patent, Trademark, Copyright, etc.
• Mines, Oil wells and gas wells;
• Loose tools.

Correct option is (c) time

Correct option is (b) Written down value method

Correct option is (b) Land

The net amount which is expected to be realised on the final disposal of a fixed asset is called scrap value.

Straight-line method of depreciation is appropriate for those assets, whose, useful estimated life can be determined very easily, e.g., Lease-hold properties, copyright, patent, trademark, etc.

From the viewpoint of accounting entries, there are two main methods of recording depreciation on assets :

• Method of providing depreciation on the respective assets.
• Method of provision for depreciation.

Profit and Loss A/c Dr …………………………
To Depreciation A/c …………………….
(Being amount of depreciation transferred to Profit and Loss A/c after closing the Depreciation A/c.)

Correct option is (d) Straight-line method

Correct option is (c) Written down value method

Correct option is (c) provision

Correct option is (d) Cost price

Under Reducing balance method, interest on capital employed for asset is not considered.

Straight-line method of depreciation is suitable for assets which have a small and definite useful life.

Correct option is (c) Stock

The book value of an asset is the asset’s cost minus the asset’s accumulated depreciation.

The amount of depreciation remains identical every year in Straight-line method.

Correct option is (a) Reducing balance method

Under Reducing balance method, value of asset does not become zero at the end of its estimated life.

Correct option is (a) decreases

Reducing balance method of depreciation is appropriate for those assets which are of long term use and which have balance amount after their use. e.g., Furniture, Fixtures, Plant and Machine, Building, etc.

Correct option is (a) Fixed

Correct option is (a) Two

Reducing balance method is appropriate for assets which have long term useful life.

At the end of every accounting year, the amount of depreciation is transferred to Profit and Loss A/c.

Correct option is (b) Depreciation Provision A/c

Depreciation is not to be calculated on current and liquid assets of the business, e.g., cash, stock, debtor, etc.

Depreciation is calculated on the fixed tangible asset of a business.

In Reducing balance method, depreciation is calculated on the opening balance of the asset every year.

‘Depreciation provision A/c’ is credited to record depreciation under depreciation provision method.

Depreciation means a gradual and permanent reduction in the value of an asset due to any reason.

Loss on sale of asset is recorded to debit side of Profit and Loss A/c and credit side of asset account.

The annual amount of depreciation is disclosed in annual accounts on debit side of profit and loss account and in Balance Sheet on asset side it is deducted from the cost price of an asset at the end of each accounting year.

Cost price of machines:

Annual depreciation D = C × R / 100
∴ Cost price of machines can be obtained as follows:
Where, D = 6,000; R = 5 and C=?
Cost price of machines C = D × 100 /R
= 6,000 × 100 / 5
= 1,20.000
∴ Cost price of machines = ₹ 1,20.000

Profit on sale of asset is recorded to credit side of profit and loss account and debit side of asset account.

Necessary computation and explanation:

1. Under straight-line method, the amount of depreciation is determined on the base of cost price of machine (i.e., asset). First of all, in this sum, cost price of machine will be ascertained.
Assume cost price of machine is ₹ 100 -Depreciation at 10% for six years (From 1-4-’08 to 31-3-.’14 = 6 years) = 100×10 / 100 × 6 = ₹ 60
∴ Book value / Balance of machine on 1-4-14 ₹ 40
As given opening balance (book value) of machine on 1-4-14 is ₹ 28,000.
If balance of machine is ₹ 40, the cost price is ₹ 100.
∴ If balance of machine is ₹ 28,000,
the cost price is (₹)
= 28,000 × 100 / 40 = ₹ 70,000
∴Cost price of machine = ₹ 70,000

2. In straight-line method, the amount of annual depreciation is calculated on the base of cost price of the asset, which is the same in every year.
Annual depreciation D = C×R / 100
= 70,000×10  /100 = ₹ 70,000

3. Journal entry of depreciation :

Annual depreciation:

D = \(\frac{C−S}{N}\)

Where,

D = Amount of annual depreciation =?

C = Cost price = purchase price + Installation expenses + Carriage charges

= ₹ 1,90,000 + ₹ 15,000 + ₹ 5,000 = ₹ 2,10,000

S = Scrap value = ₹ 40,000

N = Total life in a years = 10 years

D = \(\frac{2,10,000−40,000}{10}=\frac{1,70,000}{10}\) = ₹ 17,000

∴ The amount of annual deprectatlon is ₹ 17,000.