Test: Depreciation Accounting - 1 - Commerce MCQ

To calculate the depreciation for the 4th year using the Written Down Value (WDV) method, we follow these structured steps:

1. Determine the initial cost of the machinery. The purchase price is Rs. 1,20,000, and the installation expenses are Rs. 10,000. Therefore, the total value of the machinery is calculated as follows:
   Total Value = Purchase Price + Installation Expenses = 1,20,000 + 10,000 = 1,30,000
2. Calculate the depreciation for the first year. The rate of depreciation is 10% on the WDV. Thus, the first-year depreciation is:
   
3. Calculate the WDV at the beginning of the second year:
   WDV after 1st Year = Total Value − 1st Year Depreciation = 1,30,000 − 13,000 = 1,17,000
4. Calculate the depreciation for the second year:
   
5. Calculate the WDV at the beginning of the third year:
   WDV after 2nd Year = WDV after 1st Year − 2nd Year Depreciation = 1,17,000 − 11,700 = 1,05,300
6. Calculate the depreciation for the third year:
   
7. Calculate the WDV at the beginning of the fourth year:
   WDV after 3rd Year = WDV after 2nd Year − 3rd Year Depreciation = 1,05,300 − 10,530 = 94,770
8. Finally, calculate the depreciation for the fourth year:
   

Original cost = Rs.1,26,000
Salvage value = Nil
Useful life = 6 years
Depreciation for the first year under sum of years digits method:

Obsolescence of a depreciable asset may be caused by:

1. Technological changes (I): When new technology replaces the current one, the older technology or asset becomes obsolete. For example, a machine might no longer be efficient if a more advanced version is introduced.
2. Improvement in production method (II): When more efficient production methods are developed, older machines or assets used in the previous methods may become obsolete because they no longer provide the best output or efficiency.
3. Change in market demand for the product or service output (III): If there is no longer a demand for the product that the machine produces, the machine may become obsolete even if it still functions properly. This could be due to changes in customer preferences or the emergence of new alternatives.
4. Legal or other restrictions (IV): If new regulations or laws are introduced that restrict the use of certain types of equipment or processes, the asset might become obsolete as it can no longer be used legally.

All four factors (technological changes, improvements in production methods, changes in market demand, and legal restrictions) can cause obsolescence of a depreciable asset. Therefore, the correct answer is: C: All (I), (II), (III), and (IV) above.

Given:

1. Purchase price of the machine: $180,000
2. Residual value: $5,000
3. Depreciation rate: 25% per annum
4. Method: Reducing balance method
5. Purchase date: 30 April 2008
6. Depreciation period: From 30 April 2008 to 31 December 2008 (8 months)

Step 1: Calculate annual depreciation

Depreciation for a year using the reducing balance method = Cost of asset × Depreciation rate

Annual depreciation = $180,000 × 25% = $45,000

Step 2: Calculate depreciation for 8 months

Since depreciation is calculated month-to-month, we only need to calculate depreciation for 8 months (from 30 April 2008 to 31 December 2008).
Depreciation for 8 months = 8/12​ of annual depreciation

Step 3: Reducing balance at 31 December 2008

The depreciation expense for the period from 30 April 2008 to 31 December 2008 is $30,000.

Thus, the depreciation at 31 December 2008 is $30,000.

To calculate the depreciation for the first year using the Sum of Years' Digits method, follow these steps:

Step 1: Understand the formula

The formula for depreciation using the Sum of Years' Digits method is:

Where:

• Original Cost = ₹1,26,000
• Salvage Value = Nil
• Useful Life = 6 years

Step 2: Calculate the sum of years' digits

Sum of years' digits for a 6-year life:

6 + 5 + 4 + 3 + 2 + 1 = 21

Step 3: Calculate depreciation for the first year

In the first year, the remaining life of the asset is 6 years.

Depreciation for the first year:

The depreciation for the first year under the sum of years' digits method is ₹36,000.

Given:

1. Machine cost: ₹1,20,000
2. Installation expenses: ₹10,000
3. Residual value: ₹5,000
4. Useful life: 5 years
5. Repairs on 01.07.2003: ₹2,000 (Not included in the machine cost for depreciation purposes)

Step 1: Calculate the depreciable amount

Depreciable amount = (Machine cost + Installation expenses - Residual value)

{Depreciable amount} = ₹1,20,000 + ₹10,000 - ₹5,000 = ₹1,25,000

Step 2: Calculate the annual depreciation

The annual depreciation is ₹25,000, so the correct answer is Option D: ₹25,000.

I. False: Depreciation refers to the reduction in value of tangible assets (like machinery). Depletion is used for natural resources (like mines, oil). Amortization is the allocation of the cost of intangible assets (like patents, goodwill). So, they do not convey the same meaning.
II. False: When provision for depreciation is created, the Provision for Depreciation account is credited, not debited. The depreciation expense account is debited, and the provision for depreciation account is credited.
III. True: This statement is correct. Depreciation helps allocate the cost of an asset over its useful life to match the expense with the revenue generated during the asset's use.
Statement I and II are false, while Statement III is true.
Answer: D: Only (II) above is false.

Given:

1. Original cost = ₹1,26,000
2. Salvage value = ₹6,000
3. Units produced in 2nd year = 5,000 units
4. Total estimated production = 50,000 units

Step 1: Calculate depreciable amount

Depreciable amount = Original cost - Salvage value

Depreciable amount = ₹1,26,000 − ₹6,000 = ₹1,20,000

Step 2: Calculate depreciation per unit


Step 3: Calculate depreciation for 2nd year

Depreciation for 2nd year = Depreciation per unit × Units produced in 2nd year

Depreciation for 2nd year = ₹2.40 × 5,000 = ₹12,000

The depreciation for the 2nd year is ₹12,000, so the correct answer is Option D: ₹12,000.

Useful life of an assets may be determine as number of years or number of units that machine/assets is going to produce. Therefore, unit life is the number of production units expected from the use of asset.

The correct option is C.

• Fixed assets are not readily liquid and cannot be easily converted into cash. They are not sold or consumed by a company. Instead, the asset is used to produce goods and services. 
• The term “fixed” translates to the fact that these assets will not be used up or sold within the accounting year. A fixed asset typically has a physical form and is reported on the balance sheet as property, plant, and equipment.

To calculate the annual depreciation using the Straight-Line Method (SLM), we follow a systematic approach

1. Identify the variables involved in the calculation. We have:
   • Original Cost (C) = Rs. 126,000
   • Salvage Value (S) = Rs. 6,000
   • Useful Life (L) = 6 years
2. Apply the formula for annual depreciation (D) under the Straight-Line Method, which is given by:
   
3. Substitute the identified values into the formula:
   
4. Simplify the equation. First, calculate the difference between the original cost and the salvage value:
   126000 - 6000 = 120000
5. Now, divide this result by the useful life:
   

Thus, the annual depreciation under the Straight-Line Method is Rs. 20,000

The correct option is A: Rs. 10,800
Depreciation = Opening Book value x rate of depreciation

The expense that is NOT included in the acquisition cost of plant and equipment is financing costs incurred subsequent to the period after plant and equipment is put to use. Thus, the correct choice is D

To determine which expense is not included in the acquisition cost of plant and equipment, we need to analyze each option based on standard accounting principles. The acquisition cost typically encompasses all expenses necessary to prepare an asset for its intended use

Step 1: Identify the components of acquisition cost. The acquisition cost generally includes:

• Purchase price
• Sales taxes
• Delivery and handling charges
• Installation costs
• Costs related to site preparation

Step 2: Evaluate each option:

• A: Cost of site preparation: This is included in the acquisition cost as it is necessary to prepare the location for the equipment
• B: Delivery and handling charges: These are also included as they are essential for transporting the equipment to the site
• C: Installation costs: These costs are necessary to set up the equipment for use, thus included in the acquisition cost
• D: Financing costs incurred subsequent to the period after plant and equipment is put to use: These costs are not included in the acquisition cost. They are considered operational expenses that occur after the asset is already in service

Step 3: Conclusion. Based on the analysis, the correct answer is that financing costs incurred after the equipment is operational are not part of the acquisition cost

The correct answer is the worth of assets when it is no longer useful.  

• Scrap value, also known as salvage value or residual value, is the estimated value of an asset at the end of its useful life.
• In other words, it's the worth of an asset after it has been fully depreciated over the period of its usability.
• Scrap value is an important concept in finance and accounting as it helps businesses to provide a more accurate estimation of their tangible assets' worth and calculate depreciation more precisely.
• However, assumptions about scrap value may vary and the real end sale value may be different from the estimated one.

• According to accepted accounting principles, all costs incurred to bring an asset to a usable condition should be capitalized.
• Capitalization is a process where a cost is added to the value of an asset, instead of being expensed.
• In this context, an expense is a cost that is immediately charged against profits and reduces them.
• Capitalizing an asset means that the cost becomes part of the value of the asset and is gradually "expensed" via depreciation over the life of the asset.
• The Sortex machine in your example is a fixed asset that ABC Ltd. plans to use in its operational activities, specifically for rice processing.
• Fixed assets are vital resources for a company since they're used over and over for several years.
• Since the machine is moved from Mumbai to Delhi before it can be put into use, the freight charges of Rs. 5,000 are considered part of the cost incurred to get the machine ready for its intended use.
• Therefore, this freight cost of Rs. 5,000 will be "capitalized", i.e., it will be added to the purchase cost of the Sortex machine.
• It will not be immediately debited to the trading account or profit and loss account (which would have been the case if it were an outright operational expense).
• Instead, it's seen as part of the investment in the machine.

Hence, added to the cost of machinery will be the treatment of freight paid in the books of ABC Ltd. 

Diminishing Balance Method

• According to the Diminishing Balance Method, depreciation is charged at a fixed percentage on the book value of the asset.
• As the book value reduces every year, it is also known as the Reducing Balance Method or Written-down Value Method.
• Since the book value reduces every year, hence the amount of depreciation also reduces every year. Under this method, the value of the asset never reduces to zero.
• This method is based on the assumption that in the earlier years the cost of repairs to the assets is low and hence more amount of depreciation should be charged. Also, in the later years, the cost of repairs will increase and therefore less amount of depreciation shall be provided. Hence, this method results in an equal burden on the profit every year during the life of the asset.

The Straight Line Method of depreciation is a method where the cost of an asset is written off in equal annual amounts over its useful economic life. This means that the same amount of depreciation is charged each year, which provides a consistent and straightforward way to allocate the cost of the asset over time.

Written-down value is the value of an asset after accounting for depreciation or amortization. It is calculated by subtracting accumulated depreciation or amortization from the asset's original value, and it reflects the asset's present worth from an accounting perspective. It is that value of asset on which depreciation has not yet been charged and can be seen in balance sheet as net book value of asset.

Given:

1. Original cost = ₹1,00,000
2. Salvage value = ₹2,000
3. Useful life = 5 years

Step 1: Calculate the depreciable amount

Depreciable amount = Original cost - Salvage value

Depreciable amount = ₹1,00,000 − ₹2,000 = ₹98,000

Step 2: Calculate the annual depreciation

Step 3: Depreciation for the 3rd year

Since depreciation is equal every year under the Straight Line Method, the depreciation for the 3rd year will also be ₹19,600.

The depreciation for the 3rd year is ₹19,600, so the correct answer is Option B: ₹19,600.

Given:

1. Cash price of the machine = $150,000
2. Estimated useful life = 5 years
3. Residual value = $0 (no residual value)

Step 1: Calculate the depreciable amount

Since there's no residual value, the depreciable amount is equal to the cash price of the machine:

Depreciable amount = Cash price = 150,000

Step 2: Calculate the annual depreciation

Using the Straight Line Method:

The charge for depreciation for the year ended 31 December is $30,000, so the correct answer is Option C: $30,000.

Let machinery on 1.04.2002 be x.
so 1st year depreciation will be x × 10/100 = x/10.
2nd year depreciation will be (x - x/10) × 10/100 = 9x/100.
so total depreciation will be x/10 + 9x/100 = 19x/100.
Therefore value of machinery on 01.04.2002 will be
x - 19x/100 = 567000
ie. 81x/100 = 567000
x = 567000 × 100 ÷ 81
= 700000

Balance on 1 april, 2004 is 567000.
it means that credit balance on 31march, 2004 is also 567000.
let the balance on 1april 2003 be x.
then depreciation will be 10%of x i.e.
10x ÷ 100 = x/10 from this we can understand that x - x/10 = 567000 .
here we found that value of which is 630000.
same process we will follow for the year 2002 to 2003 x - x/10 = 630000 and value of x is 700000.
so depreciation will be 10% of 7 lack that 70000.

Given:

1. Debit balance on April 01, 2004: ₹5,67,000
2. Depreciation rate: 10% per annum (Diminishing Balance Method)
3. Machine purchased on April 01, 2002 at an initial cost (not provided directly, but can be worked backward)
4. Depreciation method for 2003-04: Diminishing Balance Method

Step 1: Calculate depreciation for 2003-04

• Depreciation for 2003-04 would be 10% of the opening balance (as it's under the diminishing balance method).
• The opening balance on April 01, 2003 (after one year of depreciation) can be estimated as the closing balance on April 01, 2004, which is ₹5,67,000.

Let’s find the amount of depreciation using the diminishing balance method for the year 2003-04.

Step 2: Work backward from the closing balance to find the depreciation

• The closing balance on April 01, 2004 is ₹5,67,000 after two years of diminishing balance depreciation.
• Let’s calculate the opening value of the machinery account on April 01, 2003 before depreciation for 2003-04.

Let the value of the machinery on April 01, 2003 be X.

So, the opening balance on April 01, 2003 was ₹6,30,000.

Step 3: Calculate depreciation for 2003-04

Now, depreciation for 2003-04 is:

Depreciation for 2003-04 = 10% × ₹6,30,000 = ₹63,000

The depreciation provided in 2003-04 is ₹63,000, so the correct answer is Option C: ₹63,000.

Given:

1. Debit balance of machinery on April 01, 2004: ₹5,67,000
2. Machine purchase date: April 01, 2002
3. Cost of the machine (from the calculation in the previous step): ₹6,30,000 (as calculated from the diminishing balance method)
4. Rate of depreciation: 10% per annum
5. Useful life: Since no useful life is provided, we will assume that the same rate applies for depreciation under the SLM.
6. Residual value: Not provided, so assumed to be 0.

Step 1: Calculate the annual depreciation under the Straight-Line Method

Under the SLM, depreciation is calculated as:

Here, we are using the depreciation rate (10%), so we can calculate annual depreciation as:
Annual Depreciation = Cost of Asset × Depreciation Rate
Cost of the machine = ₹6,30,000
Depreciation rate = 10%
Annual Depreciation = ₹6,30,000 × 10% = ₹63,000
Step 2: Calculate total depreciation for 2002-03 and 2003-04
Since depreciation under SLM is the same every year, the depreciation for each year is ₹63,000.

• Depreciation for 2002-03 = ₹63,000
• Depreciation for 2003-04 = ₹63,000

Step 3: Total depreciation for both years
Total Depreciation = ₹63,000 + ₹63,000 = ₹1,26,000
The total depreciation under the new method (Straight-Line Method) for 2002-03 and 2003-04 is ₹1,26,000.

Given:

1. Debit balance of machinery on April 01, 2004: ₹5,67,000
2. Machine purchase date: April 01, 2002
3. Depreciation rate: 10% per annum
4. Diminishing Balance Method used until the change
5. Change to the Straight Line Method with retrospective effect from April 01, 2002

Step 1: Calculate depreciation using the Diminishing Balance Method (already provided up to April 01, 2004)

We need to compute how much depreciation has been charged so far under the Diminishing Balance Method.

• Initial cost of machinery on April 01, 2002: ₹6,30,000 (as calculated earlier)
• Depreciation for 2002-03 under DBM = 10% of ₹6,30,000 = ₹63,000
• Closing balance on April 01, 2003: ₹6,30,000 - ₹63,000 = ₹5,67,000
• Depreciation for 2003-04 under DBM = 10% of ₹5,67,000 = ₹56,700
• Closing balance on April 01, 2004: ₹5,67,000 - ₹56,700 = ₹5,10,300

Step 2: Depreciation under the Straight Line Method (SLM)

The company decided to retrospectively apply the SLM from April 01, 2002. We need to calculate the depreciation using SLM for the two years (2002-03 and 2003-04).

• Total depreciable amount = Cost of the machine - Residual value
• Residual value is not provided, so we assume it to be zero.
• Depreciable amount = ₹6,30,000 (initial cost)

Depreciation per year under SLM:

Total depreciation for 2 years under SLM (2002-03 and 2003-04):
Total Depreciation under SLM = ₹63,000 × 2 = ₹1,26,000
Depreciation already charged under DBM:

• 2002-03: ₹63,000
• 2003-04: ₹56,700
• Total Depreciation under DBM = ₹63,000 + ₹56,700 = ₹1,19,700

Step 3: Calculate further depreciation to be provided

Further depreciation = Depreciation under SLM - Depreciation already charged under DBM

Further Depreciation = ₹1,26,000 − ₹1,19,700 = ₹6,300

The further depreciation to be provided is ₹6,300, so the correct answer is C: ₹6,300.

Given:

1. Purchase date of machine: April 01, 2002
2. Cost of the machine: Not explicitly provided in the current question, but from previous calculations, it was ₹6,30,000.
3. Depreciation method used until March 31, 2004: Diminishing Balance Method (DBM) at 10% per annum.
4. Debit balance of the machinery account on April 01, 2004: ₹5,67,000.

Step 1: Calculate depreciation for 2002-03

Since the company initially used the Diminishing Balance Method at 10% per annum:

• Opening balance on April 01, 2002: ₹6,30,000
• Depreciation for 2002-03 = ₹6,30,000 × 10% = ₹63,000
• Closing balance on April 01, 2003:
  6,30,000 − 63,000 = ₹5,67,000

Step 2: Calculate depreciation for 2003-04

• Opening balance on April 01, 2003: ₹5,67,000
• Depreciation for 2003-04 = ₹5,67,000 × 10% = ₹56,700
• Closing balance on March 31, 2004:
  5,67,000 − 56,700 = ₹5,10,300

The balance in the machinery account on 31.03.2004 is ₹5,67,000.

Given:

1. Opening balance of machinery on April 01, 2004: ₹5,67,000
2. Depreciation rate: 10% per annum
3. New machine purchased on October 01, 2004: ₹60,000
4. Installation costs: ₹6,000
5. Method changed from Diminishing Balance Method to Straight Line Method (SLM) with retrospective effect from April 01, 2002.

Now, let's calculate the depreciation step by step.

Step 1: Depreciation on the existing machine (SLM)

The company retrospectively switched to the Straight Line Method from April 01, 2002. The depreciation rate remains the same, 10%. Since the change occurred with retrospective effect, we will use SLM for calculating the depreciation for 2004-05.

• Cost of existing machine = ₹5,67,000
• Depreciation rate = 10%

Depreciation for the existing machine for 2004-05:

Step 2: Depreciation on the new machine (purchased on October 01, 2004)

The new machine was purchased on October 01, 2004, with a total cost of:

• Cost of machine: ₹60,000
• Installation cost: ₹6,000
• Total cost: ₹66,000

Depreciation will be charged for 6 months (October 01, 2004 to March 31, 2005) at 10% per annum.

Depreciation for the new machine:

Step 3: Total depreciation for the year 2004-05

Total depreciation = Depreciation on the existing machine + Depreciation on the new machine:

Total Depreciation = ₹56,700 + ₹3,300 = ₹60,000

Calculation of Depreciation as per Diminishing Balance Method:

• Depreciation for 2002-03: 10% of Rs.5,67,000 = Rs.56,700
• Depreciation for 2003-04: 10% of (Rs.5,67,000 - Rs.56,700) = Rs.51,930
• Depreciation for the period from April 01, 2004, to September 30, 2004: 10% of (Rs.5,67,000 - Rs.56,700 - Rs.51,930) = Rs.44,737
• Total Depreciation under Diminishing Balance Method: Rs.1,53,367

Calculation of Depreciation as per Straight-Line Method:

• Depreciation for 2002-03: (Rs.5,67,000 - Rs.60,000) / 3 years = Rs.1,69,000
• Depreciation for 2003-04: (Rs.5,67,000 - Rs.60,000 - Rs.1,69,000) / 3 years = Rs.1,12,667
• Depreciation for the period from April 01, 2004, to September 30, 2004: (Rs.5,67,000 - Rs.60,000 - Rs.1,69,000 - Rs.1,12,667) / 2 years = Rs.63,666
• Total Depreciation under Straight-Line Method: Rs.3,45,333

Adjustment for Depreciation:

• Depreciation for 2004-05 under Straight-Line Method: (Rs.5,67,000 - Rs.60,000 - Rs.1,69,000 - Rs.1,12,667 - Rs.63,666) = Rs.1,61,667
• Less: Depreciation for 2004-05 under Diminishing Balance Method = Rs.44,737
• Adjustment for Depreciation: Rs.1,16,930

Balance Outstanding as on March 31, 2005:

• Debit balance as on April 01, 2004: Rs.5,67,000
• Add: Cost of new machine = Rs.60,000
• Add: Installation expenses = Rs.6,000
• Less: Adjustment for Depreciation = Rs.1,16,930
• Balance outstanding as of March 31, 2005: Rs.5,52,700

Given:

1. Opening accumulated provision for depreciation (beginning of 2004-2005): ₹2,00,000
2. Original cost of assets: ₹10,00,000
3. Depreciation rate: 10% (Straight Line Method)
4. Asset sold during the year:
   • Cost of asset sold: ₹5,00,000
   • Accumulated depreciation on the sold asset (beginning of the year): ₹80,000

Step 1: Calculate the depreciation for the remaining assets

After the asset costing ₹5,00,000 is sold, the remaining assets will be:

Remaining assets = ₹10,00,000 − ₹5,00,000 = ₹5,00,000

Depreciation for the remaining assets is calculated for the full year using the straight-line method at 10%:

Depreciation on remaining assets = ₹5,00,000 × 10% = ₹50,000

Step 2: Treatment of the sold asset

The asset sold had a cost of ₹5,00,000 with accumulated depreciation of ₹80,000 at the beginning of the year.

Since the asset was disposed of during the year, no further depreciation is charged on this asset for the current year, as it has already been removed from the company's books. Therefore, no depreciation is added for this asset.

Step 3: Total depreciation for the year

Depreciation is only applied to the remaining assets. Thus, the total depreciation for the year is:

Total depreciation = ₹50,000

The correct answer is B: ₹50,000.

Given Data:

• Accumulated depreciation at the beginning of the year: Rs. 2,00,000
• Original cost of all assets: Rs. 10,00,000
• Depreciation rate: 10% on a straight-line basis
• Asset sold:
  • Original cost: Rs. 5,00,000
  • Accumulated depreciation at the beginning of the year: Rs. 80,000

Steps to Calculate the Balance of Accumulated Depreciation:

1. Calculate the depreciation for the asset sold during the year:

   • Depreciation on the asset sold (Rs. 5,00,000) for the current year: Depreciation = 10% × 5,00,000 = Rs.50,000
   • Total accumulated depreciation on the sold asset by the time it was disposed of: Rs.80,000 + Rs.50,000 = Rs.1,30,000Rs.

2. Depreciation on the remaining assets:

   • Remaining assets after the sale (Original cost: Rs. 5,00,000)
   • Depreciation for the current year on these assets: 10% × 5,00,000 = Rs.50,000

3. Accumulated Depreciation at the End of the Year:

   • Starting accumulated depreciation: Rs. 2,00,000
   • Subtract accumulated depreciation of the asset sold: Rs. 1,30,000
   • Add depreciation for the remaining assets: Rs. 50,000

Final Calculation:

2,00,000 − 1,30,000 + 50,000 = Rs.1,20,000

Given this thorough recalculation, the balance of the accumulated depreciation account at the end of the year is indeed Rs. 1,20,000.

Answer: . Rs. 1,20,000