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 :
    1.4.17Purchased a second - hand machinery for Rs.40,000
    1.4.17Spent Rs.10,000 on repairs for making it serviceable.
    30.9.17Purchased additional new machinery for Rs.20,000
    31.12.17Repairs and renewals of machinery Rs.3,000.
    31.3.18Depreciate 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.
    01.04.14To Bank A/c - Cost 55,00031.03.15By Depreciation 5,000
         By Balance c/d 50,000
       55,000   55,000
    01.04.15To Balance b/d 50,00031.03.16By Depreciation A/c  
    01.04.15To Bank A/c (f2) 9,500 (5,000+900) 5,900
        31.03.16By Balance c/d 53,600
       59,500   59,500
    01.04.16To Balance b/d 53,60031.03.17By Depreciation A/c 5,900
        31.03.17By Balance c/d 47,700
       53,600   53,600
    01.04.17To Balance b/d 47,70031.03.18By Depreciation A/c  
    01.10.17To Bank A/c (f3) 8,400 (5,900+400) 6,300
        31.03.18By Balance c/d 49,800
       56,100   56,100
    01.04.18To 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 = Rs.(55,0005,000)10 = Rs.5,000 per annum
    Depreciation on 2nd Furniture =  cost 9,500 & scarp value 500 so deprication   = Rs.(9,500500)10 = Rs.900 per annum
    Depreciation on 3rd Furniture = cost 8400 & scarp value 400 so deprication = Rs.(8,400400)10 = Rs.800 per annum

    Dr.      Cr.
    1.04.17To Bank A/c - Cost 40,00031.3.18By Depreciation A/c   
     To Bank A/c - Repair 10,000 (5,000+1,000) 6,000
    30.09.17To Bank A/c - Cost 20,000 By Balance c/d 64,000
       70,000   70,000
    1.4.18To 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
    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

    2014   2015   
    Apr 1To Bank A/c 40,000Mar 31By Balance c/d 40,000
       40,000   40,000
    2015   2015   
    Apr 1To Balance  b/d 40,000Oct 1By Machinery Disposal A/c 40,000
       40,000   40,000

    Provision for Depreciation Account

    2015   2015   
    Mar 31To Balance  c/d 4,000Mar 31By Depreciation A/c 4,000
       4,000   4,000
    2015   2015   
    Oct 1To Machinery Disposal  A/c 6,000Apr 1By Balance b/d 4,000
        Oct 1By Depreciation A/c 2,000
       6,000   6,000

    Machinery Disposal Account

    2015   2015   
    Oct 1To Machinery A/c 40,000Oct 1By 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. 

    Dr.      Cr.
    01.04.15To Bank A/c - cost  (M1) 6,00,00031.03.16By Depreciation A/c 70,000
    01.10.15To Bank A/c (M2) 2,00,000 By Balance c/d 7,30,000
       8,00,000   8,00,000
    01.04.16To Balance b/d 7,30,00031.03.17By Deprecation A/c 73,000
         By Balance c/d 6,57,000
       7,30,000   7,30,000
    01.04.17To Balance b/d 6,57,00001.10.17By Cash A/c 2,86,000
    01.10.17To Bank A/c (M3) 4,48,000 By Profit & Loss A/c 1,75,700
        31.03.18By Depreciation A/c 63,800
         By Balance c/d 5,79,500
       11,05,000   11,05,000
    01.04.18To Balance b/d 5,79,500    
    Working Notes:
    ParticularsMachine IMachine IIMachine IIITotal
    Cost (5,82,000+18,000)6,00,0002,00,0004,48,000 
    Less: Depreciation for 2015-16 @ 10%-60,000-10,000070,000
    Less: Depreciation for 2016-17 @ 10%-54,000-19,000073,000
    Less : Depreciation for 2017-18 @ 10%-24,300-17,100-22,40063,800
    Less: Sale value-2,86,000   
    Loss on sale1,75,700   
    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.