FA Questions

Unit 3

Depreciation, Provisions and Reserves

Question1.
Which of the following methods of depreciation is not recognized by Income Tax Law?
(a) Straight line Method
(b) None of these
(c) Both, Straight Line and Diminishing Balance Methods
(d) Diminishing Balance Method

Answer

Answer: (a) Straight line Method

Question 2.
Asset Disposal A/c is prepared when :
(a) Provision for Depreciation A/c is prepared
(b) Asset A/c is prepared
(c) Profit & Loss A/c is prepared
(d) Depreciation A/c is prepared

Answer

Answer: (a) Provision for Depreciation A/c is prepared

Question 3.
Which of the following is the example of Capital Reserve?
(a) Workmen’s Compensation Fund
(b) None of these
(c) Premium Received on issue of shares or debentures
(d) General Reserve

Answer

Answer: (c) Premium Received on issue of shares or debentures

Question 4.
Which of the following is the example of Revenue Reserve?
(a) Profit on Redemption of Debentures
(b) Profit on Revaluation of Fixed
(c) Investment Fluctuation Fund
(d) Profit on Re-issue of forfeited shares

Answer

Answer: (c) Investment Fluctuation Fund

Question 5.
Dividend Equalisation Reserve is :
(a) Specific Reserve
(b) None of these
(c) Secret Reserve
(d) General Reserve

Answer

Answer: (a) Specific Reserve

Question 6.
General Reserves are shown in :
(a) Revaluation Account
(b) Profit and Loss Account
(c) None of these
(d) Balance Sheet

Answer

Answer: (d) Balance Sheet

Question 7.
According to Companies Act, 1956 Secret Reserves can be created by:
(a) Only Private Company
(b) Banking and insurance companies
(c) Only Public Company
(d) Companies Registered under Companies Act

Answer

Answer: (b) Banking and insurance companies

Question 8.
The loss on sale of an asset is debited to:
(a) Profit and Loss Account
(b) Trial Balance Cr. Side
(c) Balance Sheet
(d) Trading Account

Answer

Answer: (a) Profit and Loss Account

Question 9.
Depreciation is Charged on :
(a) Current Assets
(b) Fixed Tangible Assets
(c) None of these
(d) Both Current and Fixed Assets

Answer

Answer: (b) Fixed Tangible Assets

Question 10.
At the end of the year, Depreciation Account is transferred to :
(a) Balance Sheet
(b) Trading Account
(c) Profit & Loss Appropriation Account
(d) Profit & Loss Account

Answer

Answer: (d) Profit & Loss Account

Question 11.
Provision is created by debiting :
(a) Profit and Loss Account
(b) None of these
(c) Profit and Loss Appropriation Account
(d) Trading Account

Answer

Answer: (a) Profit and Loss Account

Question 12.
The cause of Depreciation is :
(a) Wear and tear
(b) Obsolescence
(c) All of these
(d) Usage of Asset

Answer

Answer: (c) All of these

Question 13.
Depreciation is a process of :
(a) Allocation
(b) Valuation
(c) None of these
(d) Depletion

Answer

Answer: (a) Allocation

Question 14.
Under Reducing Balance Method, depreciation to be charged :
(a) Scrap Value
(b) None of these
(c) Real Value
(d) Original value

Answer

Answer: (b) None of these

Question 15.
The depreciation charged on an asset will be credited to :
(a) Depreciation A/c
(b) Asset A/c
(c) Bank A/c
(d) Cash A/c

Answer

Answer: (b) Asset A/c

Question 16.
Every fixed asset loses its value due to use or other reasons. This decline in the value of asset
is known as
(a) Amortization
(b) Provisions
(c) Depreciation
(d) Devaluation

Answer

Answer: (c) Depreciation

Explanation:
The fixed assets are long-term assets. They help in the production of goods and services.
However, when an asset is in use its value decreases due to the normal wear and tear, efflux
of time and obsolescence. This reduction in the value of a fixed asset is known as
depreciation.

Question 17.
Following are the causes of Depreciation except
(a) Wear and tear due to use or passage of time.
(b) normal factors
(c) Expiration of legal rights.
(d) Obsolescence.

Answer

Answer: (b) normal factors

Explanation:
The correct option is (b).

Wear and tear due to use or passage of time means deterioration, and the consequent
diminution in an assets value, arising from its use in business operations for earning revenue.
Wear and tear is the physical deterioration. an asset deteriorates simply with the passage of
time, even if they are not being put to any use.

Expiration of legal rights certain categories of assets lose their value after the agreement
governing their use in business comes to an end after the expiry of pre-determined period.
Obsolescence is another factor leading to depreciation of fixed assets. Obsolescence means
the fact of being “out-of-date”. Obsolescence implies to an existing asset becoming out-of-
date on account of the availability of better type of asset.

So, only normal factors are not a cause of depreciation

Question 18.
Following are the causes of Depreciation except
(a) Natural resources
(b) Fixed asset
(c) Liabilities
(d) Intangible assets

Answer

Answer: (a) Natural resources

Explanation:
Depletion is an accrual accounting technique used to allocate the cost of extracting natural
resources such as timber, minerals, and oil from the earth. Like depreciation and
amortization, depletion is a non-cash expense that lowers the cost value of an asset
incrementally through scheduled charges to income.

Question 19.
An alternative term used for accumulated depreciation expenses?
(a) Provision for depreciation
(b) Cumulative depreciation
(c) Targeted depreciation
(d) Depletion

Answer

Answer: (a) Provision for depreciation

Explanation:
Provision for depreciation is an alternative term used for accumulated depreciation expenses.
Depreciation expense is recognized on the income statement as a non-cash expense that
reduces the company’s net income.
Question 20.
Depreciation charged under diminishing method
(a) Increase every year
(b) Decrease every year
(c) Increase in one year and decrease another year
(d) Same every year

Answer

Answer: (b) Decrease every year

Explanation:
Depreciation charged by diminishing value method will decrease every year as the asset will
decrease in its value every year due to obslence and wear and tear etc. So correct answer is b

Question 21.
Which of the following is not a type of reserve
(a) Provision for bad debt
(b) General reserve
(c) Workmen compensation fund
(d) Retained earnings

Answer

Answer: (a) Provision for bad debt

Explanation:
Provision for bad debts is a liability for the business and is not any reserve.

Question 22.
What is depreciation?
(a) Cost of using a fixed asset
(b) The value of asset
(c) Portion of a fixed assets cost consumed during the current accounting
(d) Cost of fixed asset’s repair

Answer

Answer: (a) Cost of using a fixed asset

Explanation:
Depreciation is the cost of using a fixed asset .It is the decrease in the value of a fixed asset
due to wear and tear in the asset due to their constant use.Example- Decrease in the value of
machine as they become old.

Question 23.
Depreciation helps in determining
(a) Accurate level of profit
(b) Increases the value of asset
(c) Revenue generation
(d) Increase the burden of tax

Answer

Answer: (a) Accurate level of profit

Explanation:
The purpose of depreciation is to achieve the matching principle of accounting, that is, a
company is attempting to match the historical cost of a productive asset (that has a useful life
of more than a year) to the revenues earned from using the asset.

Question 24.
What is the rate of charging depreciation under diminishing method?
(a) 12% p.a.
(b) 15% p.a.
(c) 10% p.a.
(d) Not fixed

Answer

Answer: (d) Not fixed

Explanation:
Under this method, the amount of depreciation is calculated as a fixed percentage of the
reducing or diminishing value of the asset standing in the books at the beginning of the year,
so as to bring down the book value of the asset to its residual value. The amount of
depreciation goes on decreasing every year.
Question 25.
Under which depreciation method the amount of depreciation expenses remains same
throughout the useful life of a fixed asset
(a) Straight line method
(b) Reducing balance method
(c) Number of units produced method
(d) Machine hours method

Answer

Answer: (a) Straight line method

Explanation:
Under straight line method of depreciation the amount of depreciation expenses remains same
in the entire useful life of fixed asset because, under straight line method the depreciation is
charged on the original cost of the asset and not on diminishing value of the asset.