NCERT MOST IMPORTANT QUESTIONS CLASS – 11 | ACCOUNTANCY IMPORTANT QUESTIONS | CHAPTER –7 Depreciation, Provisions and Reserves| EDUGROWN |

NCERT Most important question:

Q1. Explain the reasons of depreciation in an asset

Ans: The reasons of depreciation in an assets are as explained below:

1. Depreciation in an asset can occur for a variety of reasons, including wear and tear from use or the passage of time.
2. Assets become obsolete after a specific amount of time due to obsolescence.
3. Assets’ legal rights may expire after a predetermined period. 
4. Depreciation may occur due to unusual circumstances such as an accident, fire, or natural disaster..

Q2. Define provision. What are the examples of provision?

Ans: The expenses or losses related to the present accounting period which are still not incurred cannot be recorded as their amount is not known with certainty are recorded in provision. The examples of provisions are:

1. Provision for Depreciation.
2. Provision for taxation.
3. Provision for doubtful and bad debt.
4. Provision for discount of debtors.
5. Provision for repair and renewal.

Q3. Differentiate between specific and general reserve.

Ans: The difference between specific and general reserve are:

S.no	General Reserve	Specific Reserve
1. 2. 3.	It was established as a free reserve.It can be utilised as a source of funding anything.It improves the financial situation of the firm’s position.	It was designed with a specific objective in mind.It is used purely for the purpose  for which it was designed.It has no effect on the company’s financial situation.

Q4. Differential between capital Reserve and revenue reserve

Ans: The difference between capital Reserve and revenue reserve are:

S.no	Capital Reserve	Revenue Reserve
1. 2. 3.	They arise as a result of the company’s day-to-day operations.They are accessible for dividend distribution.They’re made for unique objectives or unforeseeable circumstances.	They are not a result of the company’s day-to-day operations.They are not eligible for dividend distribution.They’re made to fit every situation as a legal necessity or as an example of accounting practice.

Q5. How provisions are shown in balance sheet ?

Ans: In the balance sheet, provisions are handled in the following ways:

1. On the asset side of the balance sheet, it is deducted from the concerned assets, and in the case of provision for doubtful debt, it is deducted from the amount of various debtors.
2. Provision for taxes and provision for repairs and renewals are recorded on the liabilities side of the balance sheet, alongside current liabilities.

Q6. The cost of truck is 1100000 and net salvage value after 15 years is 60000. Calculate the appropriate rate of depreciation using written down method.

Ans: Formula for Rate of Depreciation (R): R={1-n√S/C} ×100

r = Rate of depreciation

n = Expected useful life

s = Scrap value

c = Cost of an asset

By putting the values in formula

R= 1-15√60000/1100000 ×100 = 16.77%

Q7. Differentiate between straight line and written down methods of depreciation.

Ans: The difference between straight line and written down methods of depreciation are:

S.No	Straight Line Method	Written Down Method
1. 2. 3. 4.	Depreciation is charged according to the original cost or historical cost ofthe asset. Annual Depreciation amount is constant They are not recognised under Income Tax Law Best suited for assets which have low repair and maintenance cost	Depreciation is charged according to the Net book value of the asset Depreciation is highest in the first year then it reduces every year They are recognised under Income Tax Laws Best suited for assets which require highrepair and maintenance cost.

Q8. The initial cost of the truck is Rs. 2,60,000 and the useful life of the asset is 10 years and net scrap value is estimated to Rs. 60,000. Calculate the amount of depreciation to be charged every year using straight line method

Ans: Formula for calculating depreciation:Depreciation=Cost of asset- Estimated net residential valueEstimated useful life of the assetDepreciation=Cost of asset- Estimated net residential valueEstimated useful life of the asset

By putting value in formulaDepreciation=260,000- 60,000  10=20000Depreciation=260,000- 60,000  10=20000

Q9. Describe the advantage of straight line method and written down value method.

Ans: The straight line approach has the following advantages:

1. It is very basic and simple to grasp.
2. It allows for asset depreciation up to net scrap value or zero value.
3. Because depreciation is constant year after year, comparing profits from two or more years will be simple.
4. It is employed when the assets’ life expectancy can be determined.

The Written Down Method has the Following Advantages:

1. Its assumptions are more plausible.
2. It is recognised by tax legislation.
3. Because the first year has the biggest depreciation, the loss from obsolescence is minimised.

Q10. Explain the various types of reserve

Ans: The Reserves are Divided into Two Categories: 

1. General reserve and specific reserve: General reserve was developed as a free reserve, allowing the corporation to use it for any purpose. While a specific reserve is set aside for certain purposes such as workers’ compensation, dividend equalisation, and so on.
2. Capital reserve and revenue reserve: Capital reserve is formed from capital profit and does not emerge from the business’s running activities. They are not eligible for dividend distribution. Revenue reserve is formed through the business’s operating activities. They can be used to write off capital losses or to distribute bonuses.

Q11. What is ‘Depreciation’?
Solution:
Depreciation means fall in book value of depreciable fixed asset because of

1. wear and tear of the asset
2. passage/efflux of time
3. obsolescence
4. accident

A machinery costing ₹ 1,00,000 and its useful life is 10 years; so, depreciation is calculated as:
Annual Depreciation per annum
= Cost of Asset-Estimated Scrap Value/Expected or Estimated life of Asset
= 100000/10 = ₹ 10,000

Q12. State briefly the need for providing depreciation.
Solution:
The needs for providing depreciation are given below.

1. To ascertain the correct profit or loss: Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to Profit and Loss Account. Assets are used for earning revenues and its cost is charged in form of depreciation from Profit and Loss Account.
2. To show true and fair view of financial statements: If depreciation is not charged, assets will be shown at higher value than their actual value in the balance sheet. Consequently, the balance sheet will not reflect true and fair view of financial statements.
3. For ascertaining the accurate cost of production: Depreciation on the assets, which are engaged in production, is included in the cost of production. If depreciation is not charged, the cost of production is underestimated, which will lead to low selling price and thus leads to low profit.
4. To provide funds for replacement of assets: Unlike other expenses, depreciation is non cash expense. So, the amount of depreciation debited to the profit and loss account will be retained in the business. These funds will be available for replacement of fixed assets when its useful life ends.
5. To meet the legal requirement: To comply with the provisions of the Companies Act and Income Tax Act, it is necessary to charge depreciation.

Q13. What are the causes of depreciation?
Solution:

1. Use of asset: Because of constant use of the fixed assets there exists a normal wear and tear which leads to fall in the value of the assets.
2. Passage of time: Whether assets are used or not, with the passage of time, its effective life will decrease.
3. Obsolescence: Because of new technologies, innovations and inventions, assets purchased currently may become outdated later which leads to the obsolescence of fixed assets.
4. Accident: An asset may lose its value due to mishaps such as a fire accident, theft or by natural calamities and they are permanent in nature.

Q14. Explain basic factors affecting the amount of depreciation.
Solution:

1. Original cost of asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The total cost of an asset include all expenses incurred up to the point the asset is ready for use like freight expenses and installation charges.
   Total Cost= Purchase Price+ Freight Expenses+ Installation Charges.
2. Estimated useful life: Every asset has its useful life other than its physical life in terms of number of years and units used by a business. The asset may exist physically but may not be able to produce the goods at a reasonable cost. For example, an asset is likely to lose its useful value within 15years, its useful life, i.e., life for purpose of accounting should be considered as only 15 years
3. Estimated scrap value: It is estimated as the net realisable value of an asset at the end of its useful life. It is deducted from the total cost of an asset and the difference is written off over the useful life of the asset. For example, Furniture acquired at ₹ 1,30,000, its useful life is estimated to be 10 years and it is estimated scrap value ₹ 10,000.
   Depreciation per annum= 1,30,000-10,000/10 years= 12,000

Q15. Distinguish between straight line method and written down value method of calculating depreciation.
Solution:

Straight Line Method	Written Down Value Method
Depreciation is calculated on the original cost of an asset.	Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
Equal amount of depreciation is charged each year over the useful life of the asset.	Diminishing amount of depreciation is charged each year over the useful life of the asset.
Book value of the asset becomes zero at the end of its effective life.	Book value of the asset can never be zero.
It is suitable for the assets such as patents, copyright, land and buildings which have lesser possibility of obsolescence and lesser repair charges.	It is suitable for assets which needs more repair in the later years such as plant and machinery and car.
As depreciation remains same over the years but repair cost increases in the later years, there will be unequal effect over the life of the asset.	As depreciation cost is high and repairs are less in the initial years but in the latter years the repair costs increase and depreciation cost decreases, there will be equal effect over the life of the asset.
It is not recognised under the income tax act.	It is recognised under the income tax act.

Q16. “In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year”. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.
Solution:
The written down value method is most appropriate to overcome the burden of the profit and loss account because of high depreciation and repair costs over the years of the asset. The cost of depreciation reduces and the repair and maintenance expenses increase over the yea₹ However, the entire burden will not get ease to the management.

Q17. What are the effects of depreciation on profit and loss account and balance sheet?
Solution:
The effects of depreciation on Profit and Loss Account are as follows:

1. An increase in depreciation will be debited in the profit and loss account which reduces net profit.
2. Hence total expenses increase which leads to an excess of debit over credit balance.

The effects of depreciation on Balance Sheet are as follows:

1. The original cost or book value of the concerned asset gets reduced.
2. The overall balance of asset’s column in the balance sheet gets reduced.

Q18. Distinguish between ‘provision’ and ‘reserve’.
Solution:

Provision	Reserve
It is charge against profit.	It is an appropriation of profit.
It is created to meet a specific liability or contingencies.	It is made for strengthening the financial position of the business. Some reserves are also mandatory under law.
It is recorded on the debit side of profit and loss account.	It is recorded on the credit side of the profit and loss appropriation account.
It can be shown either (i) by way of deduction from the item on the assets side for which it is created, or (ii) in the liabilities side along with the current liabilities.	It is shown on the liabilities side after capital.
It cannot be utilized for dividend distribution.	It can be utilized for dividend distribution.
It is never invested outside the business.	It can be invested outside the business.
It reduces net profits.	It reduces only divisible profit.

Q19. Give four examples each of ‘provision’ and ‘reserves’.
Solution:
Four examples of provision are given below.

1. Provision for bad and doubtful debts
2. Provision for discount on debtors
3. Provision for depreciation
4. Provision for tax

Four examples of reserve are given below.

1. General reserve
2. Capital redemption reserve
3. Dividend equalisation reserve
4. Debenture redemption reserve

Q20. Distinguish between ‘revenue reserve’ and ‘capital reserve’.
Solution:

Revenue Reserve	Capital Reserve
It is formed out of revenue profit which is earned from normal activities of business operations.	It is formed out of capital profit which is a gain from other than normal activities of business operations, such as sale of fixed assets.
It can be used for distribution of dividend.	It cannot be used for distribution of dividend.
It is created for increasing the financial position of the business.	It is created for the purpose of the Companies Act.

Q21. Give four examples each of ‘revenue reserve’ and ‘capital reserve’.
Solution:
Examples of revenue reserve are as follows:

1. General reserve
2. Investment equalisation reserve
3. Dividend equalisation reserve
4. Debenture reserve

Examples of capital reserve are as follows:

1. Issues of shares at premium
2. Profit on forfeiture of shares
3. Profit on sale of fixed assets
4. Profit on redemption of debentures

Q22. Distinguish between ‘general reserve’ and ‘specific reserve’.
Solution:

Specific Reserve	General Reserve
It is created for specific purpose.	It is not created for specific purpose.
It is not available for any future contingencies or expansion of business. It is utilised only for that purpose for which it is created.	It is available for any future contingencies or expansion of business. It strengthens the financial position.
Dividend equalisation reserve, debenture redemption reserve, development rebate reserves.	Contingency reserve and general reserve

Q23. Explain the concept of ‘secret reserve’.
Solution:
Secret reserves are created by overstating liabilities or understating assets which are not shown in the balance sheet. This will reduce tax liabilities, because the liabilities are overstated. It is created by management to avoid competition by reducing profit. Creation of secret reserve is not allowed by Companies Act, 1956 which requires full disclosure of all material facts and accounting policies while preparing final statements.