Accountancy [Class 11 Semester II] Chapter 6: Depreciation
Q.1. What is Depreciation? Write its characteristics.
Answer: With the passage of time and continuous use, a fixed asset gradually wears out, and the permanent loss in its value or usefulness is called Depreciation.
Characteristics of Depreciation:
(a) Depreciation is charged only on fixed assets, not on current assets.
(b) Depreciation is a type of expense or loss; hence, it is a nominal account.
(c) Depreciation is an internal transaction of a business; no external party is involved.
(d) Depreciation does not depend on market price fluctuations.
(e) Depreciation must be accurately charged to determine the true financial result and financial position of the business.
Q.2. Name the different methods of providing depreciation.
Answer: The various methods of providing depreciation are:
1. Fixed Instalment Method or Straight-Line Method
2. Diminishing Balance Method or Reducing Balance Method
3. Annuity or Equal Instalment Method
4. Depreciation Fund or Sinking Fund Method
5. Insurance Policy Method
6. Machine Hour Rate Method
7. Revaluation Method
8. Depletion Method
9. Sum of the Years’ Digit Method
10. Repair, Maintenance and Depreciation Fund Method
Q.3. What is the Fixed Instalment or Straight-Line Method? Write its advantages and disadvantages.
Answer: When depreciation is charged every year on a fixed asset at an equal amount, the method is called the Fixed Instalment Method or Straight-Line Method. In this method, depreciation is calculated on the original cost or total capital expenditure at a fixed rate or fixed amount each year.
Formula:
Annual Depreciation = (Cost of Asset – Scrap Value) ÷ Estimated Useful Life
Advantages:
(a) It is simple to understand and easy to calculate.
(b) The value of the asset becomes nil at the end of its useful life.
(c) Suitable for assets that provide equal benefits every year.
Disadvantages:
(a) It assumes the same utility every year, which is unrealistic as assets lose efficiency with age.
(b) The interest lost on capital invested is not considered.
(c) Not recognized under the Income Tax Act and Companies Act.
Q.4. What is the Diminishing Balance or Reducing Balance Method? Write its advantages and disadvantages.
Answer: When depreciation is charged at a fixed rate each year on the written-down value of the asset at the beginning of the year, it is called the Diminishing Balance Method or Reducing Balance Method. As the written-down value decreases each year, the amount of depreciation also decreases.
Advantages:
(a) Accepted under the Income Tax Act.
(b) Higher depreciation in the early years reduces the risk of obsolescence.
Disadvantages:
(a) Calculation is comparatively complex.
(b) Interest lost on invested capital is not considered.
Q.5. Discuss the causes of depreciation.
Answer:
The causes of depreciation can be divided into two groups:
(1) Internal Causes and (2) External Causes
(1) Internal Causes:
(a) Wear and Tear: Regular use of an asset causes it to deteriorate, eventually becoming unfit for use.
(b) Depletion: Reduction in the value of assets due to extraction of natural resources.
(c) Exhaustion: Certain assets lose efficiency after a specific period.
(2) External Causes:
(a) Efflux of Time: Some assets lose value merely with the passage of time, even if not used.
(b) Obsolescence: New technology makes older assets outdated.
(c) Accidents: Loss due to natural or unforeseen events.
(d) Permanent Fall in Market Price: A permanent decline in the asset’s market value causes depreciation.
Q.6. Why is depreciation charged?
Answer: Reasons for charging depreciation are:
(1) To ascertain true production cost: Depreciation is included in production cost to determine the actual cost of production.
(2) To determine the true value of assets: Deducting depreciation from asset cost shows its correct value in accounts.
(3) To determine true profit or loss: Depreciation is an expense; without charging it, true profit/loss cannot be known.
(4) To preserve capital: Without depreciation, replacement of assets becomes impossible, reducing capital and profitability.
(5) To comply with legal requirements: As per Indian Income Tax and Companies Acts, depreciation must be charged as prescribed.
Q.7. On what factors does the amount of depreciation depend?
Answer: Depreciation amount depends on the following factors:
(1) Actual cost price of the asset
(2) Incidental expenses related to purchase (brokerage, registration, commission, transport, etc.)
(3) Installation cost (labour, engineer’s fees, materials, etc.)
(4) Estimated useful life of the asset
(5) Estimated scrap or residual value
(6) Replacement value of the asset
Q.8. Which accounting standard in India deals with depreciation?
Answer: Depreciation is governed by Accounting Standard 6 (AS-6).
Q.9. On 01/01/2020, a machine was purchased for ₹80,000. Installation cost ₹20,000. Estimated life 4 years, scrap value ₹10,000. Calculate depreciation for the year ending 31/12/2020 under Straight-Line Method.
Answer: ₹22,500
Q.10. On 01/04/2019, furniture was purchased for ₹4,000. If depreciation is 10% p.a., find the depreciation for the year ending 31/03/2020.
Answer: ₹400
Q.11. Cost of a fixed asset = ₹40,000, rate of depreciation 10% p.a. under Diminishing Balance Method. Find the written-down value after two years.
Answer: ₹32,400
Q.12. On 01/04/2020, the written-down value of a machine was ₹15,000. It was sold on 01/10/2020 at a loss of ₹250. Depreciation rate 10% p.a. under Diminishing Balance Method. Find selling price.
Answer: ₹14,000
Q.13. Cost of machine ₹50,000; installation ₹10,000; scrap value ₹5,000; life 10 years. Find depreciation under Straight-Line Method.
Answer: ₹5,500
Q.14. Mr. X purchased a machine on 01/01/2019 for ₹1,20,000. Replacement cost ₹10,000; useful life 5 years. Calculate depreciation for the 4th year at 10% p.a. under Diminishing Balance Method.
Answer: ₹9,477
0 Comments