1. Under the Written Down Value (WDV) method of depreciation, the amount of depreciation charged:
Decreases every year.
Remains constant every year.
Fluctuates randomly.
Increases every year.
Explanation:
In WDV method, depreciation is calculated on the reducing balance of the asset. Since the book value decreases each year, the depreciation amount also decreases, which matches the higher repair costs in later years.
2. According to AS 10 (Property, Plant and Equipment), when does the depreciation of an asset cease?
When the financial year ends.
When it becomes idle or is retired from active use.
When the asset is fully depreciated or derecognized (sold/scrapped).
When the market value increases.
Explanation:
Depreciation does NOT cease when the asset becomes idle. It stops only when the asset's residual value equals its carrying amount, or it is derecognized.
3. The term "Amortization" refers to writing off the value of:
Current Assets like Stock.
Tangible Assets like Machinery.
Wasting Assets like Mines.
Intangible Assets like Goodwill/Patents.
Explanation:
Depreciation is for tangible assets. Amortization is for intangible assets. Depletion is for wasting assets (natural resources).
4. In the Straight Line Method (SLM), the annual depreciation is calculated as:
Cost / Useful Life
(Market Value - Cost) / Useful Life
(Cost + Scrap Value) / Useful Life
(Cost - Scrap Value) / Useful Life
Explanation:
Depreciation spreads the "depreciable amount" over the useful life. Depreciable amount is Cost minus Scrap (Salvage) Value.
5. If an asset costing ?1,00,000 with accumulated depreciation of ?40,000 is sold for ?70,000, the result is:
No Profit No Loss
Loss of ?10,000
Profit of ?10,000
Profit of ?30,000
Explanation:
Book Value = Cost - Accumulated Depreciation = 1,00,000 - 40,000 = ?60,000. Sale Price = ?70,000. Profit = Sale Price - Book Value = 70,000 - 60,000 = ?10,000.
6. Which of the following is NOT a factor in determining the amount of depreciation?
Estimated Scrap Value
Estimated Useful Life
Historical Cost
Market Price fluctuation
Explanation:
Depreciation allocation is based on Cost, Useful Life, and Scrap Value. It is a systematic allocation of cost, not a valuation process based on daily market price changes.
7. In the "Sum of Years' Digits" (SYD) method, if the useful life is 3 years, the denominator for the fraction is:
Explanation:
SYD = n(n+1)/2. For 3 years, 1+2+3 = 6. Depreciation fractions will be 3/6, 2/6, 1/6.
8. A change in the method of depreciation (e.g., from SLM to WDV) is treated as:
A Change in Accounting Policy.
A Prior Period Error.
A Change in Accounting Estimate.
An Extraordinary Item.
Explanation:
Under revised standards (Ind AS 8 / AS 10 Revised), a change in depreciation method is considered a "Change in Accounting Estimate" and is applied prospectively (for future periods), not retrospectively.
9. The "Sinking Fund Method" of depreciation ensures that:
The asset is revalued daily.
Depreciation is charged equally.
Funds are available for the replacement of the asset at the end of its life.
Tax is minimized.
Explanation:
In this method, the depreciation amount is invested in outside securities. The interest earned and the annual provisions accumulate to provide enough cash to replace the asset when it is scrapped.
10. "Useful Life" of an asset is:
The physical life of the asset.
The period over which the asset is expected to be available for use by the enterprise.
The legal life of the asset.
10 years for all assets.
Explanation:
Useful life is an economic estimate, not necessarily physical life. A computer may work for 10 years (physical) but be useful to a tech company for only 3 years (economic).
11. Obsolescence refers to a decrease in the value of an asset due to:
Technological changes or improvements.
Wear and tear.
Passage of time.
Physical usage.
Explanation:
Obsolescence is a functional loss of value. Even if a machine is physically perfect, it may become obsolete if a newer, more efficient machine enters the market.
12. Profit on sale of a fixed asset is transferred to:
Asset Account
Depreciation Account
Capital Reserve
Profit & Loss Account
Explanation:
Profit on sale is an operating gain (or non-operating depending on view, but revenue nature) and is credited to the P&L Account.
13. The "Revaluation Method" of depreciation is most suitable for:
Patents
Loose Tools and Livestock
Land and Building
Plant and Machinery
Explanation:
For small items like tools where individual tracking is hard, they are revalued at year-end, and the difference is treated as depreciation.
14. If the estimated useful life of an asset is revised, the unamortized depreciable amount should be charged to revenue:
Over the original life.
Over the remaining useful life.
Retrospectively from the date of purchase.
Immediately in the current year.
Explanation:
A change in useful life is a Change in Accounting Estimate (AS 10). The effect is prospective, spreading the remaining book value over the new remaining life.
15. Under the "Unit of Production" method, depreciation is based on:
Time elapsed.
Market value.
Replacement cost.
Usage or Output.
Explanation:
Depreciation = (Cost - Scrap) * (Units produced in the year / Total estimated life units). It links expense to actual usage.
16. If an asset is sold, the Profit or Loss on sale is calculated by comparing the Sale Price with:
Book Value (Written Down Value) on the date of sale.
Original Cost.
Market Value.
Scrap Value.
Explanation:
Profit/Loss = Net Sale Proceeds - Book Value on date of sale. Comparing with Original Cost is incorrect because depreciation has reduced the asset's value over time.
17. Calculate the first year depreciation for an asset costing ?15,000 with a life of 5 years using "Sum of Years' Digits" (SYD) method. (Scrap value = 0).
Explanation:
Sum of digits = 1+2+3+4+5 = 15. For Year 1, remaining life is 5. Fraction = 5/15 = 1/3. Depreciation = 15,000 * 1/3 = ?5,000.