Depreciation, Provisions and Reserves

Topics in this chapter

• Depreciation Concepts and Measurement
• Depreciation Methods and Calculation
• Recording and Presenting Depreciation
• Fixed-Asset Disposal and Profit or Loss
• Provisions for Doubtful Debts
• Reserves and Their Classification

Cheat sheet

Practice questions

1. Question 1Q-58EF1F

   What is the primary cause of depreciation for a tangible fixed asset according to accounting principles?

   1. A.Fluctuation in market price
   2. B.Constant use, wear and tear, and passage of time
   3. C.Increase in the replacement cost of the asset
   4. D.Management decision to revalue assets
   See the answer and solution
2. Question 2Q-C116F3

   Under the Straight Line Method (SLM) of depreciation, the amount of depreciation charged every year:

   1. A.Decreases every year
   2. B.Increases every year
   3. C.Remains constant throughout the useful life of the asset
   4. D.Fluctuates based on the production output
   See the answer and solution
3. Question 3Q-7C2F30

   Which of the following methods of depreciation results in a reducing charge of depreciation each year?

   1. A.Straight Line Method
   2. B.Written Down Value Method
   3. C.Depletion Method
   4. D.Insurance Policy Method
   See the answer and solution
4. Question 4Q-B31B72

   A machine is purchased for Rs. 1,00,000 on April 1, 2021. The estimated useful life is 10 years, and the estimated scrap value is Rs. 10,000. What will be the annual depreciation under the Straight Line Method?

   1. A.Rs. 10,000
   2. B.Rs. 9,000
   3. C.Rs. 11,000
   4. D.Rs. 8,000
   See the answer and solution
5. Question 5Q-485175

   What is the key difference between a Provision and a Reserve?

   1. A.Provisions are created for known liabilities of uncertain amount, while reserves are created for strengthening financial position or unknown contingencies.
   2. B.Provisions are appropriations of profit, while reserves are charges against profit.
   3. C.Provisions cannot be invested outside the business, whereas reserves must always be invested.
   4. D.Provisions appear on the asset side, while reserves appear on the liability side.
   See the answer and solution