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NIOS Class 12 Accountancy Chapter 14 Depreciation
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Depreciation
Chapter: 14
| Module – 3: Financial Statement |
INTEXT QUESTIONS 14.1
Fill in the blanks:
(i) Depreciation represents a __________ in the value of fixed assets.
Ans: Diminution.
(ii) Scrap value of an asset means the _________ that it will fetch on sale at the end of its __________.
Ans: Amount, Life.
(iii) Depreciation is calculated as cost of assets less scrap value divided by __________.
Ans: Life Of Assets.
(iv) Obsolescence is one of the situations on fixed assets which arises due to change in ________, fashion, taste and other market conditions.
Ans: Technology.
INTEXT QUESTIONS 14.2
Fill in the blanks:
(i) The assumption underlying the fixed instalment method of depreciation is that the amount of the fixed assets over different years of its useful life remains the _________.
Ans: Same.
(ii) Straight line method of charging depreciation is also known as _________ or ________.
Ans: Fixed Instalment Method, Original Cost Method.
(iii) Under straight line method the value of the assets at the end of its useful life is equal to __________ or its ___________.
Ans: Zero, Net Scrap Value.
(iv) Under straight line method the total burden on Profit and Loss Account in comparison to earlier years is _____________.
Ans: More.
INTEXT QUESTIONS 14.3
Fill in the blanks with suitable words
(i) Depreciation represents a ________ in the value of fixed assets.
Ans: Fall.
(ii) The amount of depreciation on machinery is credited to ______ account.
Ans: Machinery.
(iii) Depreciation is calculated on _______ under the straight line method.
Ans: Original Cost.
(iv) Depreciation is calculated on ________ under the diminishing balance method.
Ans: Opening Balance Of The Year.
(v) The value of an asset is not reduced to ________ even when there is no scrap value in diminishing balance method of depreciation.
Ans: Zero.
INTEXT QUESTIONS 14.4
I. State which of the following statements are true and which are false:
(i) Amount of depreciation goes on reducing year after year in Straight Line Method.
Ans: False.
(ii) The amount of depreciation remains the same for all years in Diminishing Balance Method.
Ans: False.
(iii) The book value of the asset can be reduced to zero in Straight Line Method.
Ans: True.
(iv) The book value of the asset can never be reduced to zero in Diminishing Balance Method.
Ans: True.
II. Multiple Choice Questions
(i) Depreciation is charged on :
(a) Stock of Goods.
(b) Current Assets.
(c) Fixed Assets.
(d) Liquid Assets.
Ans: (c) Fixed Assets.
(ii) Obsolescence term is due to :
(a) Tear and wear of the Assets.
(b) Decrease in the value of the assets which are engaged in production.
(c) Development of improved or superior quality of equipment.
(d) Due to usage and age of assets.
Ans: (c) Development of improved or superior quality of equipment.
(iii) While charging depreciation on Fixed Assets by Straight Line Method, the value of the asset taken into consideration is :
(a) Original value.
(b) Diminished value.
(c) Market value.
(d) Book value.
Ans: (a) Original value.
(iv) While charging depreciation on Fixed Assets by Reducing Balance Method, the value of the asset taken into consideration is :
(a) Original cost.
(b) Diminished value.
(c) Market value.
(d) Book value.
Ans: (b) Diminished value.
(v) The amount calculated for charging depreciation :
(a) Includes the amount of scrap value of the Asset.
(b) Do not include the amount of scrap value of the asset.
(c) Cost of assets less scrap value.
(d) None of the above.
Ans: (c) Cost of assets less scrap value.
(vi) Out of the following which is the cause of depreciation :
(a) Normal wear and tear.
(b) Scrap value.
(c) Cost of asset.
(d) Decrease or increase in market price.
Ans: (a) Normal wear and tear.
(vii) Out of the following what will be the amount of annual depreciation :
(a) Total Depreciation + installation charges cost.
(b) Total cost – Scrap value ÷ Expected life.
(c) Total cost + Scrap value ÷ Expected life.
(d) None of the above.
Ans: (b) Total cost – Scrap value ÷ Expected life.
(viii) Which one of the following is not a factor affecting annual depreciation on an asset :
(a) Cost of the Asset.
(b) Scrap Value of the asset.
(c) Useful life of the asset.
(d) Annual maintenance on the asset.
Ans: (d) Annual maintenance on the asset.
(ix) Out of the following on which asset depreciation will be charged :
(a) Stock.
(b) Debtors.
(c) Machinery.
(d) Land.
Ans: (c) Machinery.
(x) Out of the following assets on which depreciation will not be charged :
(a) Machinery.
(b) Plant.
(c) Photo Copier.
(d) Stock.
Ans: (d) Stock.
| TERMINAL EXERCISE |
1. What is depreciation? Write the various objectives of providing depreciation.
Ans: Depreciation is the portion of the cost of a fixed asset charged as an expense every year due to reduction in its value caused by use, passage of time, or obsolescence.
Objectives of providing depreciation:
(i) To show true financial position of the business – If depreciation is not charged, assets will be overvalued and Balance Sheet will not show correct position.
(ii) To ascertain true profit – Without charging depreciation, profit will be overstated.
(iii) To retain funds for replacement of asset – Depreciation reduces profit and helps in retaining funds in the business for future replacement.
2. What are the causes of providing depreciation?
Ans: (i) Normal wear and tear due to usage: Continuous use of assets reduces their efficiency and value.
(ii) Wear and tear due to passage of time: Natural factors like wind, sun, and rain reduce value even without use.
(iii) Obsolescence due to improved technology: New machines make old ones less useful or outdated.
(iv) Change in fashion, taste, or market conditions: Demand for certain goods decreases, reducing value of related assets.
3. What are the two methods of providing depreciation? Explain their merits and demerits.
Ans: Methods:
(i) Straight Line Method.
(ii) Diminishing Balance Method.
(A) Straight Line Method: Under this method, depreciation is charged uniformly every year on the cost of the asset.
Merits:
(i) Simplicity: Easy to calculate and understand.
(ii) Asset is completely written off: Value becomes zero or equal to scrap value at the end of its life.
Demerits:
(i) Difficulty in computation: Separate calculation is needed for different assets.
(ii) Illogical: Repair cost increases in later years but depreciation remains same, causing unequal burden.
(B) Diminishing Balance Method: Under this method, depreciation is charged at a fixed percentage on the written down value every year, so it decreases annually.
Merits:
(i) Equal burden on Profit and Loss Account: Higher depreciation in early years and lower later balances repair costs.
Demerits:
(i) Asset cannot be completely written off: Value never becomes zero.
(ii) Complexity: Rate and calculation are difficult to determine.
4. What are the objectives of providing depreciation?
Ans: (i) To show true financial position of the business.
(ii) To ascertain correct profit.
(iii) To retain funds for replacement of assets.
5. Distinguish between Straight Line Method and Diminishing Balance Method of Depreciation.
Ans:
| Basis | Straight Line Method (SLM) | Diminishing Balance Method (DBM) |
| (i) Basis of Calculation | Depreciation is calculated on original cost of the asset. | Depreciation is calculated on original cost in first year and on written down value in subsequent years. |
| (ii) Amount of Depreciation | Same amount every year. | Decreases year after year. |
| (iii) Value of Asset | Can be reduced to zero or scrap value. | Never becomes zero. |
| (iv) Depreciation and Repairs | Total burden increases in later years. | Total burden remains almost equal every year. |
6. Krishnamohan Limited purchased a machinery on October 1, 2008 for Rs. 90,000 and spent Rs. 10,000 on its erection. The depreciation is to be charged @ 10% p. a. on original cost. Show the Machinery Account for three years if books are closed on March 31 every year.
Ans: Working Notes
Cost of Machinery
Purchase price = ₹90,000
Erection charges = ₹10,000
Original Cost = ₹1,00,000
Rate of Depreciation = 10% p.a. on original cost (Straight Line Method)
Annual Depreciation
= 10% of ₹1,00,000 = ₹10,000 per year
For first year (Oct 1, 2008 – Mar 31, 2009 = 6 months)
= ₹10,000 × 6/12 = ₹5,000
| Dr. | Cr. | ||||
| Date | Particulars | ₹ | Date | Particulars | ₹ |
| 2008 | 2009 | ||||
| Oct 01 | To Bank A/c (Purchase) | 90,000 | Mar 31 | By Depreciation A/c (₹1,00,000 × 10% × 6/12) | 5,000 |
| Oct 01 | To Bank A/c (Erection) | 10,000 | Mar 31 | By Balance c/d | 95,000 |
| 1,00,000 | 1,00,000 | ||||
| 2009 | 2010 | ||||
| Apr 01 | To Balance b/d | 95,000 | Mar 31 | By Depreciation A/c (₹1,00,000 × 10%) | 10,000 |
| Mar 31 | By Balance c/d | 85,000 | |||
| 95,000 | 95,000 | ||||
| 2010 | 2011 | ||||
| Apr 01 | To Balance b/d | 85,000 | Mar 31 | By Depreciation A/c (₹1,00,000 × 10%) | 10,000 |
| Mar 31 | By Balance c/d | 75,000 | |||
| 85,000 | 85,000 |
7. On April 1, 2008 Aashi Limited purchased a machinery for Rs. 80,000 and spent `Rs. 20,000 on its repairs and installation. On September 30, 2011, the machinery was sold for Rs. 60,000. Prepare Machinery Account for the year 2008 to 2011, if depreciation is charged @ 10% p. a. by Straight Line Method.
Ans: Machinery Account (Straight Line Method @ 10% p.a.)
Cost of Machinery = ₹80,000 + ₹20,000 = ₹1,00,000
Depreciation per year = 10% of ₹1,00,000 = ₹10,000
Depreciation Calculation
2008–09 = ₹10,000
2009–10 = ₹10,000
2010–11 = ₹10,000
2011–12 (6 months) = ₹5,000
Total Depreciation = ₹35,000
Book Value on 30 Sept 2011 = ₹1,00,000 – ₹35,000 = ₹65,000
Sale Value = ₹60,000 → Loss = ₹5,000
Machinery Account
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
| 2008 Apr 1 | To Bank (Purchase + Installation) | 1,00,000 | 2009 Mar 31 | By Depreciation | 10,000 |
| 2009 Mar 31 | By Balance c/d | 90,000 | |||
| 2009 Apr 1 | To Balance b/d | 90,000 | 2010 Mar 31 | By Depreciation | 10,000 |
| 2010 Mar 31 | By Balance c/d | 80,000 | |||
| 2010 Apr 1 | To Balance b/d | 80,000 | 2011 Mar 31 | By Depreciation | 10,000 |
| 2011 Mar 31 | By Balance c/d | 70,000 | |||
| 2011 Apr 1 | To Balance b/d | 70,000 | 2011 Sept 30 | By Depreciation | 5,000 |
| 2011 Sept 30 | By Bank (Sale) | 60,000 | |||
| 2011 Sept 30 | By Loss on Sale | 5,000 |
8. Ajay Kumar and Company purchased machinery for Rs. 20,000 on April 1, 2007. The Machinery is depreciated at 10% per annum on the straight line method. On October 1, 2010, the machinery was sold for Rs. 8,000. Give the Machinery Account if books are closed on March 31 every year.
Ans: Machinery Account (SLM @ 10% p.a.)
Cost of Machinery = ₹20,000
Depreciation per year = 10% of ₹20,000 = ₹2,000
Depreciation Calculation:
2007–08 = ₹2,000
2008–09 = ₹2,000
2009–10 = ₹2,000
2010–11 (6 months) = ₹1,000
Total Depreciation = ₹7,000
Book Value on 1 Oct 2010 = ₹20,000 – ₹7,000 = ₹13,000
Sale Value = ₹8,000 → Loss = ₹5,000
Machinery Account
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
| 2007 Apr 1 | To Bank (Purchase) | 20,000 | 2008 Mar 31 | By Depreciation | 2,000 |
| 2008 Mar 31 | By Balance c/d | 18,000 | |||
| 2008 Apr 1 | To Balance b/d | 18,000 | 2009 Mar 31 | By Depreciation | 2,000 |
| 2009 Mar 31 | By Balance c/d | 16,000 | |||
| 2009 Apr 1 | To Balance b/d | 16,000 | 2010 Mar 31 | By Depreciation | 2,000 |
| 2010 Mar 31 | By Balance c/d | 14,000 | |||
| 2010 Apr 1 | To Balance b/d | 14,000 | 2010 Oct 1 | By Depreciation | 1,000 |
| 2010 Oct 1 | By Bank (Sale) | 8,000 | |||
| 2010 Oct 1 | By Loss on Sale | 5,000 |
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