### Depreciation - Test Papers

CBSE Test Paper 01

Ch-6 Depreciation Provisions and Reserves

1. Which method is approved by income tax authorities for charging depreciation?

2. Name the method that assumes that an asset should be depreciated more in the earlier years and less in later years of use.

3. Charging the whole cost of asset in the first year itself is not correct. Why?

4. Although, written down value method is based upon a more realistic assumption, it suffers from some limitations. Give any three such limitations.

5. Name and explain different type of reserves in details.

6. On 1st April 2014, merchant purchased furniture costing Rs.55,000. It is estimated that its life is 10 years at the end of which it will be sold Rs.5,000. Additions are made on 1st April 2015 and 1st October 2017 to the value of Rs.9,500 and Rs.8,400 (Residual values Rs.500 and Rs.400 respectively). Show the Furniture Account for the first four years, if Depreciation is written off according to the Straight Line Method.

7. From the following transactions of concern, prepare the Machinery Account for the year ending 31 st March, 2017 :
 1.4.17 Purchased a second - hand machinery for Rs.40,000 1.4.17 Spent Rs.10,000 on repairs for making it serviceable. 30.9.17 Purchased additional new machinery for Rs.20,000 31.12.17 Repairs and renewals of machinery Rs.3,000. 31.3.18 Depreciate the machinery at 10% per annum.
8. A firm purchased on 1st January, 2010 a second-hand machinery for Rs.36,000 and spent Rs.4,000 on its installation.
On 1st July in the same year, another machinery costing Rs.20,000 was purchased. On 1st July, 2012 machinery brought on 1st January, 2010 was sold for Rs.12,000 and a new machine purchased for Rs.64,000 on the same date. Depreciation is provided annually on 31st December @ 10% per annum on the written down value method. Show the machinery account from 2010 to 2012.
9. A Company purchased a machine for Rs. 40,000 on April 1, 2014. On October 1, 2015 it was sold for Rs. 13,000. The company charges depreciation @ 10% p.a. on straight-line method. Show Machinery Account, Provision for Depreciation Account and Machinery Disposal account if books are closed on March 31 each year.
10. A firm purchased on 1st April 2015 certain machinery for Rs.5,82,000 and spent Rs.18,000 on its installation. On 1st October 2015, additional machinery costing Rs.2,00,000 was purchased. On 1st October 2017, the machinery purchased on 1st April 2015 was auctioned for Rs.2,86,000 plus CGST and SGST @ 6% each and new machinery for Rs.4,00,000, plus IGST @ 12% was purchased on the same date. Depreciation was provided annually on 31st March at the rate of 10% on the Written Down Value Method. Prepare the Machinery Account for the three years ended 31st March 2018.

CBSE Test Paper 01
Ch-6 Depreciation Provisions and Reserves

1. Written Down value method. Written-down value is the value of an asset after accounting for depreciation or amortization.
2. Written down value method. It is also known as Reducing Balance or Reducing the Installment Method or Diminishing Balance Method. Under this method, the depreciation is calculated at a certain fixed percentage each year on the decreasing book value commonly known as WDV of the asset (book value less depreciation).
3. Since this is not in conformity with the matching principle which requires revenues for a given period to be matched against expenses for the said period. The asset is used for more than one year. So the expenses of the depreciation also has to be charged for all those years, during which the asset is used.
4. Limitations of the Written Down Value Method
Although this method is based upon a more realistic assumption it suffers from the following limitations
1. It does not take into consideration the interest on capital invested in the asset.
2. It does not provide for the replacement of the asset on the expiry of its useful life.
3. The formula to obtain the rate of depreciation can be applied only when there is a residual value of the asset.
5. Type of Reserves
1. Revenue Reserves:- The reserves created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend are known as revenue reserves.
Revenue reserves can be classified into the following two types of reserves:-
1. General Reserve:- As suggested by the name the reserves which are not created for a specific purpose is general reserve. It strengthens the financial position of the business. It is also known as free reserve or contingency reserve.
2. Specific Reserve:- As suggested by the name, these are the reserves that are created for some specific purpose and can be utilized only for that purpose. e.g., Debenture Redemption Reserve, Workmen Compensation Fund, Investment Fluctuation Fund etc.
2. Capital Reserve:- The reserves which are created out of capital profits and are not available for distribution as dividend are known as capital reserve. These reserves are kept to prepare the company for any unforeseen event like inflation, instability, need to expand the business. Capital reserves can be used for writing off capital losses or issue of bonus shares in case of a company. Capital profit treated as capital reserves e.g. Premium on issue of securities, Profit on redemption of debentures, Profit on reissue of forfeited shares etc.
6.  Dr. Cr. Date Particulars LF Rs. Date Particulars LF Rs. 01.04.14 To Bank A/c - Cost 55,000 31.03.15 By Depreciation 5,000 By Balance c/d 50,000 55,000 55,000 01.04.15 To Balance b/d 50,000 31.03.16 By Depreciation A/c 01.04.15 To Bank A/c (f2) 9,500 (5,000+900) 5,900 31.03.16 By Balance c/d 53,600 59,500 59,500 01.04.16 To Balance b/d 53,600 31.03.17 By Depreciation A/c 5,900 31.03.17 By Balance c/d 47,700 53,600 53,600 01.04.17 To Balance b/d 47,700 31.03.18 By Depreciation A/c 01.10.17 To Bank A/c (f3) 8,400 (5,900+400) 6,300 31.03.18 By Balance c/d 49,800 56,100 56,100 01.04.18 To Balance b/d 49,800
Depreciation = Total cost - scarp value / life of assets  Total cost = Amount paid for machinery at the time of purchase. Scarp value = Sale value of machine at the time of sale  Depreciation on 1st Furniture = cost 55,000 & scarp value 5,000 so deprication = $\frac{Rs.\left(55,000-5,000\right)}{10}$ = Rs.5,000 per annum
Depreciation on 2nd Furniture =  cost 9,500 & scarp value 500 so deprication   = $\frac{Rs.\left(9,500-500\right)}{10}$ = Rs.900 per annum
Depreciation on 3rd Furniture = cost 8400 & scarp value 400 so deprication = $\frac{Rs.\left(8,400-400\right)}{10}$ = Rs.800 per annum
7. MACHINERY ACCOUNT

 Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 1.04.17 To Bank A/c - Cost 40,000 31.3.18 By Depreciation A/c To Bank A/c - Repair 10,000 (5,000+1,000) 6,000 30.09.17 To Bank A/c - Cost 20,000 By Balance c/d 64,000 70,000 70,000 1.4.18 To Balance b/d 64,000
Amount of Dep on Machine 1 = (40,000+10,000)*10% = 5,000 Amount of Dep on Machine 2 = 20,000* 10%*6/12 = 1,000 Repairs made on purchase of machinery is capitalised while repairs made afterwards will be debited to repairs account.

8. DrMachinery AccountCr
DateParticularsJ.F.Amt (Rs.)DateParticulars J.F.Amt (Rs.)
2010   2010
Jan 1To Bank A/c (Machine I) 40,000Dec 31By Depreciation A/c
(Rs. 36,000 + Rs. 4,000)       Machine I4,000
Jul 1To Bank A/c (Machine II) 20,000     Machine II [(20,000*10%*)6/12]1,000 5,000
Dec 31By Balance c/d
Machine I (Rs. 40,000 -Rs.4,000)36,000
Machine II (Rs. 20,000-Rs.1,000)19,000 55,000
60,000    60,000
2011   2011
Jan 1To Balance b/d  Dec 31By Depreciation A/c
Machine I                  36,000        Machine I3,600
Machine II                 19,000 55,000      Machine II1,900 5,500
Dec 31By Balance c/d
Machine I (Rs.36,000-Rs.3,600)32,400
Machine II(Rs.19,000-Rs.1,900)17,100 49,500
55,000    55,000
2012   2012
Jan 1To Balance b/d  Jul 1By Depreciation A/c (Machine I)  1,620
Machine I                         32,400   By Bank A/c  12,000
Machine II                        17,100 49,500 By Profit and Loss A/c (Loss) Rs.(32,400-1,620-12,000)  18,780
Jul 1To Bank A/c (Machine III) 64,000
Dec 31By Depreciation A/c
Machine II1,710
Machine III3,200 4,910
Dec 31By Balance c/d
Machine II |(Rs. 17,100-Rs. 1,710)15,390
Machine III(Rs.64,000-Rs.3,200)60,800 76,190
1,13,500    1,13,500
2013
Jan 1To Balance b/d
(Machine II) 15,390
(Machine III) 60,800
Working Notes:-
1. Calculation of Depreciation on July 1,2012 on Machine I =  (32,400*10% )*6/12 = 1,620
2. Calculation of Depreciation on Dec 31,2012 on Machine III = (64,000*10%)*6/12 = 3,200
3. Depreciation is calculated on Balance or Book Value of the Machine because the firm has adopted the Written Down Value of the Depreciation.
9. Machinery Account

 Date Particulars J.F Amt(Rs.) Date Particulars J.F. Amt(Rs.) 2014 2015 Apr 1 To Bank A/c 40,000 Mar 31 By Balance c/d 40,000 40,000 40,000 2015 2015 Apr 1 To Balance  b/d 40,000 Oct 1 By Machinery Disposal A/c 40,000 40,000 40,000

Provision for Depreciation Account

 Date Particulars J.F Amt(Rs.) Date Particulars J.F. Amt(Rs.) 2015 2015 Mar 31 To Balance  c/d 4,000 Mar 31 By Depreciation A/c 4,000 4,000 4,000 2015 2015 Oct 1 To Machinery Disposal  A/c 6,000 Apr 1 By Balance b/d 4,000 Oct 1 By Depreciation A/c 2,000 6,000 6,000

Machinery Disposal Account

 Date Particulars J.F Amt(Rs.) Date Particulars J.F. Amt(Rs.) 2015 2015 Oct 1 To Machinery A/c 40,000 Oct 1 By Provision for Dep. A/c 6,000 By Cash A/c (sale value) 13,000 By Profit & Loss A/c 21,000 40,000 40,000
Note : When provision for depreciation account is maintained the amount of depreciation to be provided in a particular year is debited to Profit & Loss A/c and corresponding credited is given to Provision for Depreciation A/c. The Asset A/c appears in books at its original value and Provision for Depreciation appears on the Liability side of the balance sheet.
10. MACHINERY ACCOUNT

 Dr. Cr. Date Particulars J.F. Rs. Date Particulars J.F. Rs. 01.04.15 To Bank A/c - cost  (M1) 6,00,000 31.03.16 By Depreciation A/c 70,000 01.10.15 To Bank A/c (M2) 2,00,000 By Balance c/d 7,30,000 8,00,000 8,00,000 01.04.16 To Balance b/d 7,30,000 31.03.17 By Deprecation A/c 73,000 By Balance c/d 6,57,000 7,30,000 7,30,000 01.04.17 To Balance b/d 6,57,000 01.10.17 By Cash A/c 2,86,000 01.10.17 To Bank A/c (M3) 4,48,000 By Profit & Loss A/c 1,75,700 31.03.18 By Depreciation A/c 63,800 By Balance c/d 5,79,500 11,05,000 11,05,000 01.04.18 To Balance b/d 5,79,500
Working Notes:
 Particulars Machine I Machine II Machine III Total Cost (5,82,000+18,000) 6,00,000 2,00,000 4,48,000 Less: Depreciation for 2015-16 @ 10% -60,000 -10,000 0 70,000 W.D.V. 5,40,000 1,90,000 4,48,000 Less: Depreciation for 2016-17 @ 10% -54,000 -19,000 0 73,000 W.D.V. 4,86,000 1,71,000 4,48,000 Less : Depreciation for 2017-18 @ 10% -24,300 -17,100 -22,400 63,800 W.D.V. 4,61,700 1,53,900 4,25,600 Less: Sale value -2,86,000 Loss on sale 1,75,700
Depreciation is calculated by Diminishing value method so it is calculated on balance value of an asset or written down value of asset not on the cost of the asset.  GST paid on purchase of asset increase the cost of the asset.