DK Goel Solutions Class 11 Accountancy Chapter 16 Depreciation

Short Answer Questions

Question 1. 

Solution  1: Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or the value of an asset.

Below are the two reasons for providing depreciation:-

1.) For ascertaining the true profit or loss by profit & loss account.

2.) For showing the true financial position by the balance sheet.

Question 2. 

Solution  2: Below are advantages of using Straight Line Method:-

1.) Simplicity

2.) Assets can be completely written off

3.) Knowledge of Original Cost and Up-to-date depreciation

4.) Equity of Depreciation Burden

Question 3. 

Solution  3: Below are merits of using written down value Method:-

1.) Easy Calculation

2.) Equal charge against income

3.) No undue pressure in later years

4) Balance of assets is never written off to zero

Question 4. 

Solution  4: Below are demerits of Reducing Instalment Method:-

1.) Asset cannot be completely written off

2.) Omission of Interest Factor

Question 5. 

Solution  5:

Question 6. 

Solution  6: Straight line method is known as Original Cost Method. Under this method depreciation charged at a fixed percentage on the original cost of the asset. The amount of depreciation remains equal from year and as such the method is also known as ‘Equal Instalments Method’ and ‘Fixed Instalment Method’. Under this Method the amount of deprecation is calculated by the following formula:-

Question 7. 

Solution  7: When part of the asset is sold or disposed off, it is appropriate to open a new account called “asset disposal account’. It provides a complete and clear view of all the transactions involved in the sale of an asset and shows the profit and loss on sale of asset.

(i) transfer the book value of asset to Asset disposal account:-

    Asset Disposal A/c     Dr.

          To Asset A/c 

(ii) Sale of Asset:-

Bank A/c      Dr.

    To Asset Disposal A/c 

(iii) Profit on sale of asset

Asset Disposal A/c      Dr.

           To Profit on sale of asset A/c

Or

Loss on sale of asset

Loss on sale of asset A/c      Dr.

           To Asset Disposal A/c

Practical Questions

Question 1.

Solution 1:

Point of Knowledge:-

Methods of Calculating Depreciation:-

1. Straight Line Method
2. Written Down Value Method
3. Annuity Method
4. Depreciation Fund Method
5. Insurance Policy Method
6. Revaluation Method
7. Depletion Method
8. Machine Hour Rate Method

Question 2. 

Solution 2:

Point of Knowledge:-

Straight line method is known as Original Cost Method. Under this method depreciation charged at a fixed percentage on the original cost of the asset. The amount of depreciation remains equal from year and as such the method is also known as ‘Equal Instalments Method’ and ‘Fixed Instalment Method’.

Question 3. 

Solution 3:

Working Note:-

Value of machinery = Rs. 8,000 + Rs. 3,500 = Rs. 11,500

Calculation of Profit and Loss:-

Point of Knowledge:-

1.) For ascertaining the true profit or loss by profit & loss account.

2.) For showing the true financial position by the balance sheet.

Question 4. 

Solution 4:

Point of Knowledge:-

The amount of depreciation to be charged for the year is calculated by using various methods. But the two main methods for calculating depreciation are:

1. Fixed Percentage on Original Cost or Fixed Instalment or Straight Line Method.
2. Fixed Percentage on Diminishing Balance or Reducing Instalment Method or Written Down Value Method.

Question 5. 

Solution 5:

Working Note:-

Calculation of profit and loss:-

Question 6. 

Solution 6:

Point of Knowledge:-

1. It is a simple method of calculating the depreciation.
2. In this method, assets can be depreciated up to the estimated scrap value or zero value.
3. It is easy to calculate the amount of depreciation under this method.
4. The Profit and Loss Account is debited or charged with same amount of depreciation every year and uniformity is maintained on the expenditure.

Question 7. 

Solution 7:

Question 8. 

Solution 8:

Point of Knowledge:-

1. It is a simple method of calculating the depreciation.
2. In this method, assets can be depreciated up to the estimated scrap value or zero value.
3. It is easy to calculate the amount of depreciation under this method.
4. The Profit and Loss Account is debited or charged with same amount of depreciation every year and uniformity is maintained on the expenditure.

Question 9.

Solution 9:

Point of Knowledge:-

1. There is same weightage on Profit and Loss Account of depreciation and repair expenses.
2. This method is easier than Straight Line Method.
3. In case of expansion and increase in assets, the depreciation can be computed easily by this method.
4. This method is acceptable by the Government under the Income Tax Act.

Question 10. 

Solution 10:

Point of Knowledge:-

Repair charges of Rs. 2,000 have been incurred on Dec., 31 whereas the machinery has been purchased on Sept. 30. As such, it is an expenditure of revenue nature and hence will not be recorded in Machinery A/c

Question 11. 

Solution 11:

Question 12. 

Solution 12:

Working Note:-

Total Value of Machinery = 30,000 + 4,000 + 1,000 = 35,000

Calculation of Profit and loss:-

Question 13. 

Solution 13:

Point of Knowledge:-

The following are the disadvantages of the Written Down Value Method:

1. In this method the value of the asset can never be zero.
2. It is a difficult task to ascertain the proper rate of depreciation.
3. There is no provision of interest on capital invested in use of assets.

Question 14. 

Solution 14:

Working Note:-

Calculation of Profit and Loss on Sale of Machinery:-

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 15.

Solution 15:

Working Note:-

Value of Machine 1 = Rs. 2,40,000 + Rs. 4,000 + Rs.6,000 = Rs. 2,50,000

Value of Machine 2 = Rs. 75,000 + Rs. 25,000 = Rs. 1,00,000

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 16.

Solution 16:

Question 17. 

Solution 17:

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 18.

Solution 18:

Working Note:-

Calculation of Profit and loss on Sale of assets:-

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

 Question 19. 

Solution 19:

Working Note:-

Value of Machinery = Rs. 5,70,000 + Rs. 30,000 = Rs. 6,00,000

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 20. 

Solution 20:

Working Note:-

Value of Machinery 1  = Rs. 5,000 + Rs. 5,000 + Rs. 2,500 = Rs. 12,500

Value of Machinery 2  = Rs. 5,000 + Rs. 5,000 + Rs. 5,000 = Rs. 15,000

Calculation of Profit and loss on sale of machinery 1:-

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 21. 

Solution 21:

Question 22. 

Solution 22:

Working Note:-

Value of Machinery 1 = Rs. 22,000 + Rs. 44,000 + Rs. 11,000 = Rs. 77,000

Value of Machinery 2 = Rs. 52,000 + Rs. 52,000 + Rs. 13,000 = Rs. 1,17,000

Question 23. 

Solution 23:

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 24.

Solution 24:

Working Note:-

Calculation of Profit  and Loss on Sale of Machinery 1:-

Question 25. 

Solution 25:

Working Note:-

Calculation of Profit and Loss on Sale of Plant and Machinery 1:-

Question 26. 

Solution 26:

Question 27. 

Solution 27:

Working Note:-

Calculation of Profit and Loss on sales of Machinery 1:-

Question 28. 

Solution 28:

Working Note:-

Value of Machinery = Rs. 6,80,000 + Rs. 1,20,000 = Rs. 8,00,000

Calculation of Profit and Loss on Sale of machinery:-

Question 29.

Solution 29:

Working Note:-

Value of Machinery = Rs. 30,000 + Rs. 20,000 = Rs. 50,000

Calculation of Profit and Loss on Sale of Machinery:-

Question 30. 

Solution 30:

Question 31. 

Solution 31:

Question 32. 

Solution 32:

Question 33. 

Solution 33:

Working Note:-

Calculation of Profit and loss on Sale of machinery:-

Point of Knowledge:-

Amount on Annual Depreciation under Straight Line Method:-

Question 34. 

Solution 34:

Question 35. 

Solution 35:

Point of Knowledge:-

(i) Asset Disposal Account: In case of asset being sold. a new account named ‘Asset Disposal Account’ is opened in the ledger for the purpose of calculating profit or loss on the sale of an asset. Journal entries for sale or disposal of asset will depend upon the method of recording depreciation.

(ii) Written Down Value/Diminishing Balance/Reducing Balance Method of Charging Depreciation: Under this method, depreciation is charged at a fixed rate on the reducing balance or cost less depreciation every year. A fixed rate on the written down value of the asset is charged as depreciation every year the expected useful life of the asset.

Question 36. 

Solution 36:

Question 37. 

Solution 37:

Point of Knowledge:-

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet would not present a true and fair view of the financial position.

Question 38. 

Solution 38:

Point of Knowledge:-

(i) Asset Disposal Account: In case of asset being sold. a new account named ‘Asset Disposal Account’ is opened in the ledger for the purpose of calculating profit or loss on the sale of an asset. Journal entries for sale or disposal of asset will depend upon the method of recording depreciation.

(ii) Written Down Value/Diminishing Balance/Reducing Balance Method of Charging Depreciation: Under this method, depreciation is charged at a fixed rate on the reducing balance or cost less depreciation every year. A fixed rate on the written down value of the asset is charged as depreciation every year the expected useful life of the asset.