📘 CHAPTER 7: DEPRECIATION, PROVISIONS AND RESERVES
(All previous years' questions – with answers)
1. Reserve is not shown in the Balance Sheet.
a) Secret b) General c) Revenue d) Capital
(2018 Mar – 1 Mark)
2. Which term refers to writing off the cost of intangible assets like Patents, Copyright, Trade Marks etc.?
a) Amortisation b) Depletion c) Obsolescence d) None of these
(2019 Mar – 1 Mark)
3. Writing off the cost of intangible assets like patent, copy right etc. is known as
(a) Depreciation (b) Depletion (c) Amortization (d) Obsolescence
(2020 Mar – 1 Mark)
4. The term 'amortisation' is related with the decrease in the value of
a. Fixed asset b. Current asset c. Wasting asset d. Intangible asset
(2020 Imp – 1 Mark)
5. Depreciation is charged on
(a) Current Assets (b) Fixed Assets (c) Current and Fixed Assets (d) None of these
(2021 Mar & 2021 Imp – 1 Mark)
6. The amount of depreciation charged under Diminishing balance method
(a) increases every year (b) remains constant every year (c) equals to its scrap value (d) decreases every year
(2022 Mar – 1 Mark)
7. Decrease in the value of intangible asset is known as
(a) Depletion (b) Fluctuation (c) Appreciation (d) Amortization
(2022 Imp – 1 Mark)
8. ______ is the term used to show the decrease in the value of natural resources like mines, quarries etc.
(a) Depreciation (b) Amortisation (c) Depletion (d) Obsolescence
(2023 Mar – 1 Mark)
9. Writing-off the cost of intangible assets like Goodwill, Patents, Copyright etc. is
(a) Depreciation (b) Depletion (c) Amortisation (d) Fluctuation
(2023 Imp – 1 Mark)
10. ______ reserve is the retention of net profit, not meant for specific purpose.
(a) Capital (b) Revenue (c) Secret (d) General
(2024 Mar – 1 Mark)
11. Cost of the asset Rs.80,000 Scrap value Rs.10,000 Useful life period - 10 years
(2025 Mar – 1 Mark)
12. State any two differences between reserves and provision.
(2023 Mar – 2 Marks)
13. Give two examples of 'Revenue Reserve'.
(2023 Imp – 2 Marks)
14. Calculate depreciation from the given information :
Cost of Machinery Rs.36,000; Installation charges Rs.10,000; Transportation cost Rs.6,000; Scrap value Rs.4,000; Estimated life 8 years.
(2024 Mar – 2 Marks)
15. Write any three needs for charging depreciation on assets.
(2021 Mar – 3 Marks)
16. Explain the term 'depreciation'. State any two methods of providing depreciation.
(2021 Imp – 3 Marks)
17. Chandra Traders purchased a Motor Van on 01-01-2013 for Rs.6,00,000. The firm writes-off depreciation at the rate of 10% p.a. on written down value method. Draw up Motor Van account for the first three Years.
(2018 Imp – 4 Marks)
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2013 Jan 1 | To Bank | 6,00,000 | 2013 Dec 31 | By Depreciation A/c | 60,000 |
| 2013 Dec 31 | By Balance c/d | 5,40,000 | |||
| Total | 6,00,000 | Total | 6,00,000 | ||
| 2014 Jan 1 | To Balance b/d | 5,40,000 | 2014 Dec 31 | By Depreciation A/c | 54,000 |
| 2014 Dec 31 | By Balance c/d | 4,86,000 | |||
| Total | 5,40,000 | Total | 5,40,000 | ||
| 2015 Jan 1 | To Balance b/d | 4,86,000 | 2015 Dec 31 | By Depreciation A/c | 48,600 |
| 2015 Dec 31 | By Balance c/d | 4,37,400 | |||
| Total | 4,86,000 | Total | 4,86,000 |
18. A company purchased a machinery for Rs. 50,000 on 30th June 2015. Depreciation is charged at 10% under straight line method and accounts are closed on 31st December every year. a) Show the machinery account up to 31st December 2016. b) Distinguish between straight line method and written down value method. Write two points.
(2019 Mar – 4 Marks)
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2015 Jun 30 | To Bank | 50,000 | 2015 Dec 31 | By Depreciation (6 months) | 2,500 |
| 2015 Dec 31 | By Balance c/d | 47,500 | |||
| Total | 50,000 | Total | 50,000 | ||
| 2016 Jan 1 | To Balance b/d | 47,500 | 2016 Dec 31 | By Depreciation | 5,000 |
| 2016 Dec 31 | By Balance c/d | 42,500 | |||
| Total | 47,500 | Total | 47,500 |
b) Differences: 1) SLM charges fixed amount every year, WDV charges decreasing amount. 2) In SLM, asset value becomes zero at end of life; in WDV, it never becomes zero. 3) SLM is based on original cost, WDV on written down value. (any two)
19. M/s. Radhika Textile Mills purchased a machinery on 1st April, 2015 for Rs.2,00,000 and spent Rs.30,000 for its installation. Another machine was purchased on January 1st 2017 for Rs.30,000. Depreciation is charged at the rate of 20% on written down value method. Show machinery account up to 31st March,2018.
(2019 Imp – 4 Marks)
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2015 Apr 1 | To Bank (2,00,000+30,000) | 2,30,000 | 2016 Mar 31 | By Depreciation A/c | 46,000 |
| 2016 Mar 31 | By Balance c/d | 1,84,000 | |||
| Total | 2,30,000 | Total | 2,30,000 | ||
| 2016 Apr 1 | To Balance b/d | 1,84,000 | 2017 Mar 31 | By Depreciation A/c | 36,800 |
| 2017 Mar 31 | By Balance c/d | 1,47,200 | |||
| Total | 1,84,000 | Total | 1,84,000 | ||
| 2017 Apr 1 | To Balance b/d | 1,47,200 | 2018 Mar 31 | By Depreciation A/c (on old) | 29,440 |
| 2017 Jan 1 | To Bank (new machine) | 30,000 | 2018 Mar 31 | By Depreciation on new (3 months: 30,000*20%*3/12) | 1,500 |
| 2018 Mar 31 | By Balance c/d | 1,46,260 | |||
| Total | 1,77,200 | Total | 1,77,200 |
20. Briefly explain the need for providing depreciation. (any four)
(2022 Mar – 4 Marks)
21. Point out any four differences between 'Provision' and 'Reserve'.
(2022 Imp – 4 Marks)
| Provision | Reserve |
|---|---|
| 1. Created for known liability (expense). | 1. Created for strengthening financial position. |
| 2. Charge against profit (debited to P&L). | 2. Appropriation of profit (credited to P&L appropriation). |
| 3. Can be used only for specific purpose. | 3. General reserve can be used for any purpose. |
| 4. Mandatory (by law/prudence). | 4. Voluntary (except some like capital redemption reserve). |
22. Seena Traders purchased a Machinery for Rs.1,00,000 and spent Rs.10,000 for the erection. The Machinery is expected a life of 10 years and after it will get Rs.10,000 as scrap value. Depreciation is charged under straight line method for first 2 years. (2023 Mar – 4 Marks)
(2023 Mar – 4 Marks) – likely prepare machinery account or show depreciation.
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| Year 1 start | To Bank | 1,10,000 | Year 1 end | By Depreciation | 10,000 |
| Year 1 end | By Balance c/d | 1,00,000 | |||
| Total | 1,10,000 | Total | 1,10,000 | ||
| Year 2 start | To Balance b/d | 1,00,000 | Year 2 end | By Depreciation | 10,000 |
| Year 2 end | By Balance c/d | 90,000 | |||
| Total | 1,00,000 | Total | 1,00,000 |
23. Write any four differences between Straight Line Method and Written Down Value Method of calculating depreciation.
(2023 Imp – 4 Marks)
| Straight Line Method | Written Down Value Method |
|---|---|
| 1. Fixed amount of depreciation every year. | 1. Decreasing amount every year. |
| 2. Depreciation is calculated on original cost. | 2. Depreciation is calculated on book value (WDV). |
| 3. Asset value can be reduced to zero. | 3. Asset value never becomes zero. |
| 4. Suitable for assets with low obsolescence (e.g., building). | 4. Suitable for assets with high obsolescence (e.g., machinery). |
24. AB Ltd. purchased a plant for Rs.4,00,000 on 1-1-2018 and spent Rs.50,000 for its installation. It is decided to depreciate at 10% under written down value method. Prepare Plant Account for 4 years.
(2024 Mar – 4 Marks)
| Year | Opening Balance | Depreciation | Closing Balance |
|---|---|---|---|
| 2018 | 4,50,000 | 45,000 | 4,05,000 |
| 2019 | 4,05,000 | 40,500 | 3,64,500 |
| 2020 | 3,64,500 | 36,450 | 3,28,050 |
| 2021 | 3,28,050 | 32,805 | 2,95,245 |
Plant Account (as per ledger format) – can be shown with journal entries or directly as above.
25. On 1st April, 2021, a machinery was purchased for Rs. 80,000 from Machine Land. On 30th June, 2023, the machinery purchased on 1st April, 2021 was sold for Rs. 60,000 and a new machinery was bought for cash Rs. 25,000. Depreciation is charged 10% p.a. on straight line method. Prepare machinery account up to 31st March, 2024.
(2025 Mar – 4 Marks)
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2021 Apr 1 | To Bank (old) | 80,000 | 2022 Mar 31 | By Depreciation A/c | 8,000 |
| 2022 Mar 31 | By Balance c/d | 72,000 | |||
| Total | 80,000 | Total | 80,000 | ||
| 2022 Apr 1 | To Balance b/d | 72,000 | 2023 Mar 31 | By Depreciation A/c | 8,000 |
| 2023 Mar 31 | By Balance c/d | 64,000 | |||
| Total | 72,000 | Total | 72,000 | ||
| 2023 Apr 1 | To Balance b/d | 64,000 | 2023 Jun 30 | By Depreciation (3 months) | 2,000 |
| 2023 Jun 30 | By Bank (sale) | 60,000 | |||
| 2023 Jun 30 | By Profit & Loss (loss on sale) | 2,000 | |||
| 2023 Jun 30 | To Bank (new) | 25,000 | 2024 Mar 31 | By Depreciation on new (9 months: 25,000*10%*9/12) | 1,875 |
| 2024 Mar 31 | By Balance c/d | 23,125 | |||
| Total | 89,000 | Total | 89,000 |
26. On July 1, 2014 Elite Printers purchased a machinery for Rs.3,00,000 and spent Rs.10,000 for its installation. It was decided to provide depreciation 10% p.a. on straight line method. Prepare machinery account for first 4 years. Assuming that books are closed on 31st December every year.
(2020 Mar – 5 Marks)
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2014 Jul 1 | To Bank | 3,10,000 | 2014 Dec 31 | By Depreciation (6 months) | 15,500 |
| 2014 Dec 31 | By Balance c/d | 2,94,500 | |||
| Total | 3,10,000 | Total | 3,10,000 | ||
| 2015 Jan 1 | To Balance b/d | 2,94,500 | 2015 Dec 31 | By Depreciation | 31,000 |
| 2015 Dec 31 | By Balance c/d | 2,63,500 | |||
| Total | 2,94,500 | Total | 2,94,500 | ||
| 2016 Jan 1 | To Balance b/d | 2,63,500 | 2016 Dec 31 | By Depreciation | 31,000 |
| 2016 Dec 31 | By Balance c/d | 2,32,500 | |||
| Total | 2,63,500 | Total | 2,63,500 | ||
| 2017 Jan 1 | To Balance b/d | 2,32,500 | 2017 Dec 31 | By Depreciation | 31,000 |
| 2017 Dec 31 | By Balance c/d | 2,01,500 | |||
| Total | 2,32,500 | Total | 2,32,500 |
27. Arun traders purchased a machinery by issuing a cheque of Rs.64,000 to the vendors on 1-10-2016. They also incurred erection charges of Rs.6,000 for the machinery. The expected economic life of the machine is 5 years and estimated scrap value is Rs.10,000. (a) Calculate the amount annual of depreciation to be charged on the machinery (b) Prepare a machinery account for the first three years under the straight line method. Assume that accounts are closed on 31st March every year.
(2020 Imp – 5 Marks)
(a) Total cost = 64,000 + 6,000 = 70,000. Scrap = 10,000. Depreciable amount = 60,000. Life = 5 years. Annual depreciation = 60,000/5 = 12,000 per year.
(b) Machinery Account (SLM)
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2016 Oct 1 | To Bank (64,000+6,000) | 70,000 | 2017 Mar 31 | By Depreciation (6 months) | 6,000 |
| 2017 Mar 31 | By Balance c/d | 64,000 | |||
| Total | 70,000 | Total | 70,000 | ||
| 2017 Apr 1 | To Balance b/d | 64,000 | 2018 Mar 31 | By Depreciation | 12,000 |
| 2018 Mar 31 | By Balance c/d | 52,000 | |||
| Total | 64,000 | Total | 64,000 | ||
| 2018 Apr 1 | To Balance b/d | 52,000 | 2019 Mar 31 | By Depreciation | 12,000 |
| 2019 Mar 31 | By Balance c/d | 40,000 | |||
| Total | 52,000 | Total | 52,000 |