83 + Interview Questions in DEPRECIATION IN GENERAL AWARENESS Page 2 InterviewSolution

51.	What is Depreciation?
Answer» Decrease in the value of fixed assets due to their regular use or expiry of time is termed as depreciation.

Discussion

52.	Explain basic factors affecting the amount of depreciation.
Answer» a. Total cost of asset- The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing asset and bringing the asset to its usable condition are included in the total cost of asset. b. Estimated useful life – Every asset has its useful life other than its physical life (in terms of number of years, units, etc.), used by a business. The useful life of an asset is considered to estimate the effective life of a fixed asset. c. Estimated scrap value – It is estimated as the net realizable value or sale value of an asset at the end of its effective life. It is deducted from the total cost of an asset.

52.

Explain basic factors affecting the amount of depreciation.

Answer»

a. Total cost of asset- The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing asset and bringing the asset to its usable condition are included in the total cost of asset.

b. Estimated useful life – Every asset has its useful life other than its physical life (in terms of number of years, units, etc.), used by a business. The useful life of an asset is considered to estimate the effective life of a fixed asset.

c. Estimated scrap value – It is estimated as the net realizable value or sale value of an asset at the end of its effective life. It is deducted from the total cost of an asset.

Discussion

53.	State briefly the need for providing depreciation.
Answer» The needs for providing depreciation are given below: a. To ascertain true net profit or net loss b. To show true and fair view of financial statements c. For ascertaining the accurate cost of production d. Distribution of dividend out of profit e. To provide funds for replacement of assets f. Consideration of tax

53.

State briefly the need for providing depreciation.

Answer»

The needs for providing depreciation are given below:

a. To ascertain true net profit or net loss

b. To show true and fair view of financial statements

c. For ascertaining the accurate cost of production

d. Distribution of dividend out of profit

e. To provide funds for replacement of assets

f. Consideration of tax

Discussion

54.	State any two causes of depreciation.
Answer» 1. Wear and tear and 2. Passage of time.

54.

State any two causes of depreciation.

Answer»

1. Wear and tear and

2. Passage of time.

Discussion

55.	State whether the following statements are True or False with reason:Balance of the depreciation account is transferred to Profit and Loss A/c.
Answer» This statement is True. Depreciation is charged to profit and Loss A/c as it is an element of Cost. It is also essential to arrive at true value of the asset and also net profit or Loss during a particular accounting period. Even if an asset is not in use, its value is reduced due to the passage of time. Depreciation is Cost/Loss to the business. It is a noncash expenditure.

55.

State whether the following statements are True or False with reason:Balance of the depreciation account is transferred to Profit and Loss A/c.

Answer»

This statement is True.

Depreciation is charged to profit and Loss A/c as it is an element of Cost. It is also essential to arrive at true value of the asset and also net profit or Loss during a particular accounting period. Even if an asset is not in use, its value is reduced due to the passage of time. Depreciation is Cost/Loss to the business. It is a noncash expenditure.

Discussion

56.	What are the effects of depreciation on profit and loss account and balance sheet?The effects of depreciation on Profit and Loss Account are given below.
Answer» a. Depreciation increases the debit side of profit and loss account and hence reduces net profit. b. Depreciation increases the total expenses, leading to an excess of debit over credit balance. The effects of depreciation on Balance Sheet are given below. a. It reduces the original cost or book value of the concerned asset. b. It reduces the overall balance of asset’s column in the balance sheet.

56.

What are the effects of depreciation on profit and loss account and balance sheet?The effects of depreciation on Profit and Loss Account are given below.

Answer»

a. Depreciation increases the debit side of profit and loss account and hence reduces net profit.

b. Depreciation increases the total expenses, leading to an excess of debit over credit balance.

The effects of depreciation on Balance Sheet are given below.

a. It reduces the original cost or book value of the concerned asset.

b. It reduces the overall balance of asset’s column in the balance sheet.

Discussion

57.	What is depreciation?
Answer» Depreciation is a gradual, continuous, and permanent decline or decrease in the value of a fixed asset due to its use, wear and tear or any other similar reason.

Discussion

58.	To which account balance of Depreciation A/c is transferred?
Answer» The balance of Depreciation A/c is transferred to profit and loss A/c at the end of the year.

Discussion

59.	Where is the profit or loss on sale of the asset is transferred?
Answer» The profit or loss on the sale of assets is transferred to the profit and loss account.

Discussion

60.	Why depreciation is charged?
Answer» Depreciation on fixed assets is charged to ascertain the correct profit or loss on its sale, to show assets at the correct value in the Balance sheet, and to provide for its replacement.

Discussion

61.	Which account is credited when depreciation is charged?
Answer» The concerned fixed asset account is credited when depreciation is charged.

Discussion

62.	What is a ‘Scrap Value’ of an asset?
Answer» The total amount whatsoever received by selling used or obsolete assets or their spare parts is called residual.

Discussion

63.	What is Fixed Instalment Method?
Answer» A method of charging depreciation in which depreciation is charged on fixed assets at a fixed percentage of its original cost is called the fixed installment method.

Discussion

64.	Why depreciation is charged even in the year of loss?
Answer» Fixed assets are used even in the year of loss and the use of fixed assets reduces its value and hence depreciation is charged even in the year of loss.

Discussion

65.	Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
Answer» Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time (due to their regular use), there exists continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation. A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as: a. To ascertain true net profit or net loss: Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to profit and loss account. Assets are used for earning revenues and its cost is charged in form of depreciation from profit and loss account. b. To show true and fair view of financial statements: If depreciation is not charged, assets are shown at higher value than their actual value in the balance sheet; consequently, the balance sheet does not reflect true view of financial statements. c. For ascertaining the accurate cost of production: Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciations not included, cost of production in under estimated, which will lead to low sale price and thus lead to low profit. d. Distribution of dividend out of profit: If depreciation is not charged, which leads to over estimating of profit &nd consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business. e. To provide funds for replacement of assets: Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life. f. Consideration of tax: If depreciation is charged, then profit and loss account will disclose less profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount. The causes for depreciation: a. Constant use: Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets. b. Expiry of time: With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets. c. Obsolescence: Due to the fast technological innovations and inventions today’s assets may be out dated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets. d. Expiry of legal rights: If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life. e. Accident – An asset may lose its value and damage may happen to it due to mishaps such as a fire accidents, theft or a natural calamity. The loss due to accident is permanent in nature. e. Accident – An asset may lose its value and damage may happen to it due to mishaps such as a fire accidents, theft or a natural calamity. The loss due to accident is permanent in nature.

65.

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Answer»

Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time (due to their regular use), there exists continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation. A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as:

a. To ascertain true net profit or net loss: Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to profit and loss account. Assets are used for earning revenues and its cost is charged in form of depreciation from profit and loss account.

b. To show true and fair view of financial statements: If depreciation is not charged, assets are shown at higher value than their actual value in the balance sheet; consequently, the balance sheet does not reflect true view of financial statements.

c. For ascertaining the accurate cost of production: Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciations not included, cost of production in under estimated, which will lead to low sale price and thus lead to low profit.

d. Distribution of dividend out of profit: If depreciation is not charged, which leads to over estimating of profit &nd consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.

e. To provide funds for replacement of assets: Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.

f. Consideration of tax: If depreciation is charged, then profit and loss account will disclose less profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.

The causes for depreciation: a. Constant use: Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.

b. Expiry of time: With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.

c. Obsolescence: Due to the fast technological innovations and inventions today’s assets may be out dated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.

d. Expiry of legal rights: If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life.

e. Accident – An asset may lose its value and damage may happen to it due to mishaps such as a fire accidents, theft or a natural calamity. The loss due to accident is permanent in nature.

Discussion

66.	State with reasons whether the following statements are True or False , (i) Making excessive provision for doubtful debits builds up the secret reserve in the business. (ii) Capital reserves are normally created out of free or distributable profits. (iii) Dividend equalisation reserve is an example of general reserve (iv) General reserve can be used only for some specific purposes. (v) ‘Provision’ is a charge against profit. (vi) Reserves are created to meet future expenses or losses the amount of which is not certain. (vii) Creation of reserve reduces taxable profits of the business.
Answer» (i) True (ii) False (iii) False (iv) False (v) True (vi) False (vii) False

Discussion

67.	Which account is debited when expenses are paid on the installation of the Machinery?
Answer» The machinery account is debited when expenses are paid for the installation of machinery.

Discussion

68.	State whether the following statements are True or False with reason:Depreciation need not be charged when a business is making a loss.
Answer» This statement is False. Depreciation is charged whether a business is making losses or profits. Depreciation is the non-cash expenditure of the business like all other expenses are charged in the same way depreciation is charge even business is making losses.

68.

State whether the following statements are True or False with reason:Depreciation need not be charged when a business is making a loss.

Answer»

This statement is False.

Depreciation is charged whether a business is making losses or profits. Depreciation is the non-cash expenditure of the business like all other expenses are charged in the same way depreciation is charge even business is making losses.

Discussion

69.	Complete the following sentences:i. Depreciation is charged on _________ asset.ii. Wages paid for Installation/fixation of Machinery is debited to ______ account.iii. Under _____________ system, the amount of depreciation changes every year.iv. Depreciation = \(\frac{Costo\,of\,AssetLess......}{Estimated\,Working\,Life\,of\,Asset}\)v. Gradual and permanent decrease in the value of asset is known as __________vi. In Fixed Instalment System the amount of depreciation is _____________ every year.vii. The amount spent on installation of Machinery is a _____________ expenditure.viii. _____________ is the value which an asset realises at the end of its useful life.ix. Depreciation Account is a _____________ account.x. Depreciation is derived from a Latin word _____________
Answer» i. Fixed ii. Machinery iii. Diminishing Balance iv. Scrap value v. Depreciation vi. Constant vii. Capital viii. Scrap value ix. Nominal x. Depretium

69.

Complete the following sentences:i. Depreciation is charged on _ asset.ii. Wages paid for Installation/fixation of Machinery is debited to account.iii. Under _ system, the amount of depreciation changes every year.iv. Depreciation = \(\frac{Costo\,of\,AssetLess......}{Estimated\,Working\,Life\,of\,Asset}\)v. Gradual and permanent decrease in the value of asset is known as vi. In Fixed Instalment System the amount of depreciation is ___ every year.vii. The amount spent on installation of Machinery is a _ expenditure.viii. _ is the value which an asset realises at the end of its useful life.ix. Depreciation Account is a _ account.x. Depreciation is derived from a Latin word _______

Answer»

i. Fixed

ii. Machinery

iii. Diminishing Balance

iv. Scrap value

v. Depreciation

vi. Constant

vii. Capital

viii. Scrap value

ix. Nominal

x. Depretium

Discussion

70.	State whether the following statements are True or False with reason:Depreciation is charged on Current Assets only.
Answer» This statement is False. Depreciation is charged only on fixed assets and not on current assets working life of fixed assets is longer and it decreases with passes of time. The value of fixed assets decreases every year so depreciation is charged on fixed assets.

70.

State whether the following statements are True or False with reason:Depreciation is charged on Current Assets only.

Answer»

This statement is False.

Depreciation is charged only on fixed assets and not on current assets working life of fixed assets is longer and it decreases with passes of time. The value of fixed assets decreases every year so depreciation is charged on fixed assets.

Discussion

71.	Do you agree or disagree with the following statements :(i) Depreciation is charged on current Assets only.(ii) Depreciation is not charged on Intangible assets.(iii) No depreciation is charged on Land.(iv) Written Down value of the asset is calculated by adding depreciation for a period of use of assets.(v) No depreciation is charged on assets purchased on credit.
Answer» (i) Disagree (ii) Disagree (iii) Agree (iv) Disagree (v) Disagree

71.

Do you agree or disagree with the following statements :(i) Depreciation is charged on current Assets only.(ii) Depreciation is not charged on Intangible assets.(iii) No depreciation is charged on Land.(iv) Written Down value of the asset is calculated by adding depreciation for a period of use of assets.(v) No depreciation is charged on assets purchased on credit.

Answer»

(i) Disagree

(ii) Disagree

(iii) Agree

(iv) Disagree

(v) Disagree

Discussion

72.	Depreciation for the second year `"@ " 10%` on Rs 15,000 purchase price will be - on the Fixed Instalment, whereas it will be - on the Diminishing Balance System.
Answer» Correct Answer - Rs 1,500, Rs 1,350.

Discussion

73.	Give four examples for provision and reserves.
Answer» Four examples of provision are: a. Provision for bad and doubtful debts b. Provision for discount on debtors c. Provision for depreciation d. Provision for taxiation Examples of reserve are: a. General reserve b. Capital resserve c. Dividend equalization reserve d. Debenture redemption reserve

73.

Give four examples for provision and reserves.

Answer»

Four examples of provision are:

a. Provision for bad and doubtful debts

b. Provision for discount on debtors

c. Provision for depreciation

d. Provision for taxiation

Examples of reserve are:

a. General reserve

b. Capital resserve

c. Dividend equalization reserve

d. Debenture redemption reserve

Discussion

74.	The following information are extract from the Trial Balance of M/s Nisha traders on 31 March 2017 `{:("Sundary Debtors" , "80,500"),("Bad debts","1,000"),("Provision for had debts","5,000"),("Additional Infromation",),("Bad Debts",Rs."500"):}` Provision is to be maintained at `2%` of Debtors. Prepare bad debts accound, Provision for bad debts account and profit and loss account.
Answer» New provision `Rs.` 1,600 Profit and loss account [Cr.] `Rs.` 1,9000

Discussion

75.	Basaria Confectioner bought a cold storage plant on July 01, 2014 for `Rs.` 1,00,000. Compare the amount of depreciation charged for first three years using: Rate of depreciation @ `10%` on original cost basis,
Answer» Depreciation for 1 year (2014-15) = `Rs.` 7500 (Charged for 9 months)

Discussion

76.	Under the __________ system of depreciation, the amount of depreciation does not change from year to year. (a) Fixed Instalment (b) Reducing Balance (c) Depletion (d) Machine Hour Rate
Answer» Correct option is (a) Fixed Instalment

Discussion

77.	Correct the following statement and rewrite the statement:The residual value of an asset increases the amount of annual depreciation.
Answer» The residual value of an asset decreases the amount of annual depreciation.

Discussion

78.	A Plant was purchased on 1st July, 2015 at a cost of `Rs.` 3,00,000 and `Rs.` 50,00 were spent on its installation. The depreciation is written off at `15%` p.a. on the straight line method. The plant was sold for `Rs.` 1,50,000 on October `Rs.` 4,00,000. including purchasing value. The accounts are closed on December 31 every year. Show the machinery account and provision for depreciation account for 3 years.
Answer» Loss on sale of Plant `Rs.` 81,875. Balance of Machine account as on 31.12.17 `Rs.` 4,00,000. Balance of Provision for Depreciation account as on 31.12.17 `Rs.` 15,000

Discussion

79.	Depreciation = \(\cfrac{cost\,of\,Asset(-)........}{Estimated\,life\,of\,Asset}\)(a) Purchase price (b) Scrap value (c) Installation charges (d) months
Answer» Correct option is (b) Scrap value

Discussion

80.	By the amount of depreciation the value of asset __________ (a) decreases (b) increases (c) becomes zero (d) remains constant
Answer» Correct option is (a) decreases

Discussion

81.	Write the word/term/phrase which can substitute each of the following statements:(i) The method of charging depreciation under which depreciation is calculated on the original cost of an asset.(ii) The method of charging depreciation under which depreciation is calculated on the balance amount.(iii) The Latin word for reduction or decline in the value of a fixed asset due to its use.(iv) An amount to which the balance in the depreciation account is transferred.(v) Transport charges, coolie charges, charges for electrification, etc. incurred for the erection of machinery.
Answer» (i) Fixed Instalment Method (ii) Reducing Balance Method (iii) Depretium (iv) Profit and Loss A/c (v) Installation Charges

81.

Write the word/term/phrase which can substitute each of the following statements:(i) The method of charging depreciation under which depreciation is calculated on the original cost of an asset.(ii) The method of charging depreciation under which depreciation is calculated on the balance amount.(iii) The Latin word for reduction or decline in the value of a fixed asset due to its use.(iv) An amount to which the balance in the depreciation account is transferred.(v) Transport charges, coolie charges, charges for electrification, etc. incurred for the erection of machinery.

Answer»

(i) Fixed Instalment Method

(ii) Reducing Balance Method

(iii) Depretium

(iv) Profit and Loss A/c

(v) Installation Charges

Discussion

82.	Correct the following statement and rewrite the statement:Depreciation provided on assets is debited to an asset accounts.
Answer» Depreciation provided on assets is credited to an asset account.

Discussion

83.	Select the most appropriate answers from the alternatives given below and rewrite the sentence:i. Decrease in the value of fixed assets is known as ________(a) Depreciation(b) Appreciation (c) Combination (d) None of theseii. Depreciation is charged only on ________ assets. (a) Fixed (b) Current (c) Non-performing (d) Fictitiousiii. The amount spent on installation of new machinery is a ________ expenditure.(a) Revenue (b) Capital (c) Deferred Revenue (d) Incomeiv. The amount that a fixed asset is expected to realise on its disposal is known as ________ (a) Book value (b) Scrap value (c) Market value (d) Original valuev. The amount of depreciation reduces year after year under ___________ (a) Fixed Instalment Method (b) Written Down Value Method (c) Depreciation Fund Method (d) Revaluation Method
Answer» i. (a) Depreciation ii. (a) Fixed iii. (b) Capital iv. (b) Scrap value v. (b) Written Down Value Method

83.

Select the most appropriate answers from the alternatives given below and rewrite the sentence:i. Decrease in the value of fixed assets is known as (a) Depreciation(b) Appreciation (c) Combination (d) None of theseii. Depreciation is charged only on assets. (a) Fixed (b) Current (c) Non-performing (d) Fictitiousiii. The amount spent on installation of new machinery is a expenditure.(a) Revenue (b) Capital (c) Deferred Revenue (d) Incomeiv. The amount that a fixed asset is expected to realise on its disposal is known as (a) Book value (b) Scrap value (c) Market value (d) Original valuev. The amount of depreciation reduces year after year under ___ (a) Fixed Instalment Method (b) Written Down Value Method (c) Depreciation Fund Method (d) Revaluation Method

Answer»

i. (a) Depreciation

ii. (a) Fixed

iii. (b) Capital

iv. (b) Scrap value

v. (b) Written Down Value Method

Discussion

Explore topic-wise InterviewSolutions in .

What is Depreciation?

Explain basic factors affecting the amount of depreciation.

State briefly the need for providing depreciation.

State any two causes of depreciation.

State whether the following statements are True or False with reason:Balance of the depreciation account is transferred to Profit and Loss A/c.

What are the effects of depreciation on profit and loss account and balance sheet?The effects of depreciation on Profit and Loss Account are given below.

What is depreciation?

To which account balance of Depreciation A/c is transferred?

Where is the profit or loss on sale of the asset is transferred?

Why depreciation is charged?

Which account is credited when depreciation is charged?

What is a ‘Scrap Value’ of an asset?

What is Fixed Instalment Method?

Why depreciation is charged even in the year of loss?

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Which account is debited when expenses are paid on the installation of the Machinery?

State whether the following statements are True or False with reason:Depreciation need not be charged when a business is making a loss.

State whether the following statements are True or False with reason:Depreciation is charged on Current Assets only.

Depreciation for the second year `"@ " 10%` on Rs 15,000 purchase price will be - on the Fixed Instalment, whereas it will be - on the Diminishing Balance System.

Give four examples for provision and reserves.

Basaria Confectioner bought a cold storage plant on July 01, 2014 for `Rs.` 1,00,000. Compare the amount of depreciation charged for first three years using: Rate of depreciation @ `10%` on original cost basis,

Under the __________ system of depreciation, the amount of depreciation does not change from year to year. (a) Fixed Instalment (b) Reducing Balance (c) Depletion (d) Machine Hour Rate

Correct the following statement and rewrite the statement:The residual value of an asset increases the amount of annual depreciation.

Depreciation = \(\cfrac{cost\,of\,Asset(-)........}{Estimated\,life\,of\,Asset}\)(a) Purchase price (b) Scrap value (c) Installation charges (d) months

By the amount of depreciation the value of asset __________ (a) decreases (b) increases (c) becomes zero (d) remains constant

Correct the following statement and rewrite the statement:Depreciation provided on assets is debited to an asset accounts.