Depreciation for CA Students

In the language of accountancy, depreciation is explained as the depletion of the marked price of any fixed asset. It involves many strategic steps and the price reduction cannot be calculated by random means. Depreciation is a process that starts existing from an asset’s creation till the time its value becomes negligible. We witness many examples of fixed assets in day-to-day life. Some of them are capital pieces of equipment in industries, agricultural machinery, apartments, land, etc. All of them are subject to depreciation except legally recognized land or plots the value of which tends to rise in course of time.

Depreciation MCQs

1. When you hear the term depreciation, what comes to your mind?

1. 1. Distribution or allocation of fixed assets among the rightful owners.

   2. Depletion of the price of assets following the modern market demand.

   3. Reduction in the quoted price of any fixed asset in a set pattern.

   4. Increase in value of assets over time.

Ans. Option (C)

2. Why do we need to assess the depreciation value of a particular fixed asset?

1. 1. It gives us useful strategies applying which we can reduce taxation amount.

   2. It helps us to determine the profit secured in the previous fiscal year.

   3. It is a mandatory rule stipulated by the income tax department.

   4. Through depreciation, we get an idea regarding the net profit of a transaction.

Ans. Option (D)

3. Why do fixed assets need to go through depreciation?

1. 1. A firm has to face depreciation in asset values due to the piling up of liabilities each year.

   2. A reduction in capital worth leads to depreciation.

   3. Wear and tear resulting from repeated operation reduces the efficiency of pieces of machinery or equipment, thus price decreases.

   4. The particular asset’s net worth gets reduced with time in the market.

Ans. Option (C)

4. How can someone define the terminology ‘obsolete’ in business accounting?

1. 1. Obsolete refers to a range of similar products that were manufactured to fulfill a purpose and no longer prove to live up to their commitment.

   2. A product status that indicates that there are better options available in the marketplace.

   3. Amount of money spent to reorganize the industry’s inventory.

   4. Disposal of old stuff as the company can afford new variations to garner more profit.

Ans. Option (A)

5. Where does the accountant allocate the charges marked under the depreciation section while preparing the balance sheet?

1. 1. In a separate account maintained by the firm only to list depreciation costs.

   2. An account that keeps a record of the cash flow.

   3. Machinery account that tracks the costs incurred due to maintenance of equipment and machinery.

   4. Repair folio.

Ans. Option (A)

 6. What do you understand by ‘salvage’?

1. 1. It is the market rate price or the definite selling price determined by the asset vendor.
   2. Salvage value represents the expected disposal value. It is a forecasted metric.
   3. Receivable cash amount that is credited to the depreciation account once the life of a fixed asset ends.
   4. Payable amount by the owner when the asset turns out to be obsolete.

 Ans. Option (B)

 7. We know that depreciation is evaluated by finding the repair expenses incurred all year round. After that, the balances are tallied in profit and loss folios. This is also termed as diminishing balance method. What is the base information that needs to be present to execute this process?

1. 1. Net value of all the fixed assets owned by a firm that is displayed on the balance sheet. 
   2. Original market value.
   3. Residual value. It is also referred to as the future price of a fixed asset and is mostly depicted as a percentage value based on its original price
   4. Balance amount

Ans. Option (A)

8. What is the fixed instalment process?

1. 1. It is the process of assessing the sum of money that is left in an individual saving bank account.
   2. It is an adjustment of transaction entries to a company’s business account that is evaluated to show that debit and credit scores are the same. 
   3. It is a methodology that states the total depreciation experienced every year is the same and fixed. 
   4. It is the quotient received by dividing the net price amount by the total useful year cycles.

Ans. Option (C)

9. Choose the correct option from the choices given below:

“The depreciation amount of any fixed asset is never going to beat its _______”

1. 1. Original price
   2. Balance amount
   3. Residual value
   4. Estimated depreciable value.

Ans. Option (D)

 10. What is the need to prepare a separate account for tracking the depreciable values?

1. 1. This is mandatory otherwise one may not understand the current valuation of assets.
   2. One must get an idea of depreciation to figure out the net liabilities.
   3. Depreciation helps us in planning the new set of assets.
   4. Depreciation facilitates the charging of costs of individual assets against the profit made.

Ans. Option (D)

 11. In which method of accountancy do we find the depreciation as a constant value?

1. 1. The method of a straight line.
   2. Declining balance methodology.
   3. Unit Production Rate.
   4. The accelerated sum-of-years methodology.

Ans. Option (A)

 12. Please choose the best possible answer that explains the meaning of ‘residual value’.

1. 1. It is a metric that is determined by assimilating the cost of buying and installing the company’s assets the price of which is bound to deplete in course of time and it will be subtracted by its salvage value.
   2. Residual value depicts the company’s valuation by studying the situation of the stock market.
   3. Residual value is defined as the net worth of all the constituent parts of the physical assets when the fixed asset has become obsolete and proves to be ill-worthy for operations.
   4. The estimated price of an asset when it is approaching its obsolescence.

Ans. Option (C)

 13. Which option gives us clarity on market value?

1. 1. It refers to the company’s overall worth as per the performance of its business. It’s a metric shown in the stock market exchange.
   2. The expected resell amount that can be secured after lending it to a new owner after the successful completion of its useful cycle.
   3. The total cost of each component used in setting up equipment when the machinery itself no longer provides efficient output.
   4. Combined value of installing an asset and purchasing it at a first-owner price point.

Ans. Option (A)

 14. How do we define the straight-line method?

1. 1. It is a strategic technique for evaluating the value depreciation of any asset in course of time. 
   2. It is a theory that states depreciation rates are identical every year and the depreciable values are even the same.
   3. It is a system of noting down the greater depreciation expenditures that had already occurred in the previous years. 
   4. This straight-line technique is an accelerated formula for understanding an asset’s depreciation.

Ans. Option (A)

 15. Can you explain ‘sum-of-years’ digits?

1. 1. (A) It is a method that postulates that each year the depreciation value remains equal and pre-fixed.
   2. (B) This is the accelerated way of evaluating any company’s asset depreciation.
   3. (C) It is the method of determining the loss of valuation as the asset reaches its obsolescence. 
   4. (D) It can track larger expenses charged in the depreciable accounts in the previous years. 

Ans. Option (B)

 16. How to describe the accounting term ‘amortization’?

1. 1. Amortization refers to a specific accrual accounting method that is implemented to deliver the expenses of extracting every possible natural resource.
   2. It is the only method that is periodically reducing the book value against loans taken by a firm.
   3. The depreciation of assets in monetary terms.
   4. (D) The wear and tear of fixed assets diminish their physical capacity with time.

Ans. Option (B)

These are a few MCQs on depreciation that is likely to clear out the doubts regarding fundamental knowledge on this topic. A thorough understanding will help an accounting student solve a related problem in the examination.