Depreciation Review Questions:

Depreciation is the loss of value of machinery after a certain time period.

Hence, to understand this concept with greater depth, it is important that certain mathematical calculations be done and some questions be answered.

Here is a list of queries that you may have and answering these questions will help you get a better grip of this topic.

Theoretical questions:

Objective Type questions:

  1. In straight line method, what happens to the level of depreciation every year?

Increases/decreases/either increases or decreases/remains constant

  1. What does depreciation mean?

Fluctuation/amortization/physical wear and tear/obsolescence

  1. What is depreciation calculated on?

Fictitious assets/fixed assets/current assets/wasting assets

  1. Which method is depreciation on straight line calculated on?

Market value/original cost/opening balance/closing balance

  1. On which basis of asset is depreciation calculated?

Book value/market value/invoice value/cost price

  1. According to diminishing balance method on what is depreciation calculated?

Average cost/original cost/market value/written down value

Short answer type question:

  1. What do you mean by the following terms: Fluctuation, Obsolescence, Depletion, Amortization?
  2. In case you are given a situation, where you are taking 3 business enterprises into consideration. If you find, depreciation in the first case, followed by depletion and amortization in the second and third case, what would be the various types of business into consideration in this case?

(Options given: Specific contractual business, exhaustion of natural resources, fixed assets)

  1. What are the various causes of depreciation? Explain them in details
  2. Here a situation is considered. Let us take Dr. A and Dr. B in a locality, who happen to be competitors in their professional domain. Since they both have bought machinery for their patients, Dr. A wishes to write an equal amount of depreciation each year, while Dr. B wants to write off larger amounts in case of early years. Since neither of them have any idea regarding depreciation methods, so how this method should be explained to them in the simplest format. Who is following a wiser strategy and why? Explain in details!

(It is important to note that written down value method is not only acceptable as per the law, but it also one of the easiest mode given that technological changes are not affected in this case)

Very Short Questions:

  1. What do you mean by depreciation?
  2. Explain 3 features of depreciation in details
  3. What is the formula for calculating depreciation under straight line method?
  4. What are the 3 factors that affect the amount of depreciation?
  5. Let us take a scenario, where a pharmaceutical producer has just found a rare solution to a grave disease and got a patent registered in his name for that. What would be the term that would be present in this profit and loss account that would be taken as cost of the patent that is written off?

Long answer type questions:

  1. Explain in details as to what you understand by Fluctuation, Obsolescence/ Depletion/Amortization?
  2. What is the difference between written down method of finding depreciation and straight line method? Explain in details.
  3. What are the advantages and disadvantages of fixed installment method?
  4. What are the positives and negatives associated with diminishing balance method?
  5. Why is it important to provide a specific value for depreciation?
  6. What are the effects of depreciation on Profit and Loss account?
  7. How does depreciation affect the Balance sheet?
  8. What are the different methods by which depreciation is calculated?
  9. Explain the straight-line method of calculating depreciation in detail?

Practical Questions:

These are a set of sums that is essential for a student to understand to ensure that they can deal with real life situations that are given to them.

  1. Let us take an example where a machine is bought on June 1, 2007, for $10,000 with depreciation rate being 20%. What would be the machinery accounts that are calculated for a period of 3 years, given that account is closed on May 30th, 2008? (Answer: $4000)
  1. What if a boiler was bought for $10,000 and certain additional amounts as $2,000 was added to it as per the forwarding charges. If depreciation rates were to be taken at 10%, for the period of 3 years, then what would be the total depreciation charges via the written down method? (Answer: Closing balance = $ 14,580, $1620, $1800,$2000)
  1. What is the concept of depreciation and how is it calculated?
  2. What is the difference between straight line method and written down method and explain both in details?
  1. If a particular product was bought for $50,000 for a period of 3 years on July 1, 2008, at 10% pa, then what would be its depreciated value, when calculated by both straight line method and written down method? (Answer: W.D.V. method $36,450, Straight line method $ 35,000)
  1. In this scenario, the details of Maharaja Enterprises are taken into consideration. Say the company wants details associated with its business that has ended on December 31, 2010. So, in this case, it is given that Debit balance of plant and machinery on January 1, 2010 is taken at $ 26840. It is also given that 3 machines which were previously standing on the books for $1.286, was now sold in 2010, for $600. It is also stated that a set of new machinery were bought in May 2010 for $5880, and installed with an additional cost of $216. Also given is the fact that the depreciation to all addition in case of plants and machinery of the factory was merely a 0% in case of old plants. In such a scenario, what would the plant and machinery account be as placed in December 2010? (Balance on machinery is taken at 25,626)
  1. What is the concept of depreciation?
  2. Why is depreciation charged in case of a factory?
  1. Let us take a situation where a particular machinery was bought for $9500, while workers who were associated with the installation procedure was paid a mere $50. How will this act as reducing installment method or even depreciated reducing installment given that its actual working life is 10years? What would also be the scenario if depreciation balance is to be counted after a period of 5 years, rate being taken at 10%? (Answer: $ 5,000 can be found with straight line method. The reducing installment method gives answer as $. 5,905)
  1. Let us take a scenario, where Negi Road Transport Corporation wishes to buy a total of 5 minibuses, each costing $ 2,00.000 on May On November 2002, one of the buses met with an accident resulting in complete loss of it. As per the rules of the Insurance company, an amount of $ 90.000 was paid off as per complete settlement. On that very day, the company decided to buy a second hand minibus at the cost of $ 1,00.000 with additional $20,000 being paidon it given that it was overhaul costs. If the depreciation rate is charged at 20%, what would be the account balance of depreciation for a period of 3 years, given that it is counted on straight line basis of depreciation which would end on Dec 31, 2004? (Answer: Loss on the destroyed bus being 10,000, final balance that is left is $ 4,74.000.                   Given that loss on machinery is placed at $25,000, balance of machinery is taken at $ 6,00.000)
  1. On the 1st of January, 2006, Neelam Sharma bought a machine whose original cost was $25,000. On this, she spent certain additional amounts that included, the cost for middle man being at $1,000, $5,000 for carriage and other freight charges that were included, $500, for getting a specialized iron pad and $3500 for total installation cost. If it is taken that machine that was bought depreciated via the written down method at the rate of 10%, then how would the balance be shown if This machine after a period of 3 years is further sold off to Deepa $30,500 with an additional brokerage cost being at $500. If the accounts were closed on December 31st of each respective years, what would be the Profit or Loss on the sale of this machine? (Answer: $ 4,485 profit would be made on it)

These are some of the most difficult problems that need to be solved. Once a student can solve these queries, all the rest are quite similar problems.

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