Get summaries, questions, answers, solutions, notes, extras, theories, practicles, PDF, and guide of Chapter 6 Depreciation, NBSE Class 10 Book Keeping (BK) textbook, which is part of the syllabus of students studying under Nagaland Board. These solutions, however, should only be treated as references and can be modified/changed.
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Summary
Depreciation is the loss in value of things used in business over time. Fixed assets like machines and furniture lose value due to constant use. This loss happens gradually and affects how much an asset is worth. For example, a chair bought years ago will not be as good or valuable today. Depreciation records this change in value.
There are several causes for depreciation. Assets lose value when used daily. Time also reduces their worth. Sometimes new inventions make old machines useless. Minerals get depleted when extracted from mines. The market value of investments can fall permanently. Accidents can damage assets too. All these factors cause depreciation.
Recording depreciation is important for many reasons. It helps calculate the real profit or loss of a business. It shows the true value of assets in accounts. It provides funds to replace old assets. It helps determine the correct cost of making goods. It ensures dividends come from profits only. It avoids paying extra income tax.
Several factors affect how much depreciation is charged. These include the total cost of the asset, its expected life, scrap value, chances of becoming outdated, additions to assets, and legal rules. Each factor is considered before deciding the amount of depreciation.
Two common methods exist for calculating depreciation. The first is the straight-line method. Here, equal amounts are deducted each year. This method is simple and easy to understand. It suits small firms and less valuable items like furniture. However, it has flaws. It does not reduce the burden on final years when repair costs rise.
The second method is the diminishing balance method. Here, depreciation decreases each year. It starts with a high amount and reduces yearly. This method suits long-life assets like buildings and machinery. It balances repair and depreciation costs. But it cannot reduce an asset’s value to zero.
Both methods have advantages and disadvantages. Straight-line method charges fixed depreciation. Diminishing balance method reduces it yearly. Straight-line suits small-value assets while diminishing balance suits big ones. Income tax laws prefer the diminishing balance method.
Examples explain how to prepare accounts using both methods. Practical questions help practice calculations. Theoretical questions test understanding of concepts. Assignments cover definitions, causes, and objectives of depreciation. They also discuss differences between methods and their uses.
Depreciation impacts business accounts significantly. It shows how assets lose value over time. Recording it properly keeps accounts accurate. This process ensures businesses run smoothly and plan for future needs.
Textbook solutions
Multiple Choice Questions (MCQs)
1. Depreciation is a/an
a. Loss
b. Asset
c. Income
d. Valuation
Answer : a. Loss
2. Depreciation is provided on:
a. Current assets
b. Fictitious assets
c. Fixed assets
d. Intangible assets
Answer : c. Fixed assets
3. Depreciation is caused by:
a. Obsolescence
b. Wear and tear
c. Passage of time
d. All of the above
Answer : d. All of the above
4. Depreciation under straight line method:
a. Remains constant each year
b. Increases each year
c. Decreases each year
d. None of the above
Answer : a. Remains constant each year
5. Depreciation is calculated on:
a. Wasting assets
b. Current assets
c. Fictitious assets
d. Fixed assets
Answer : d. Fixed assets
6. In diminishing balance method, depreciation is calculated on ______ of assets
a. Original cost
b. Average cost
c. Written down value
d. Market value
Answer : c. Written down value
Very Short Answer Type Questions
1. What is depreciation?
Answer: Loss in the value and utility of assets due to their constant use and expiry of time is termed as depreciation.
2. A mobile phone manufacturer has recently acquired a patent for new technology. What will have to be written in its ledger against the cost of patent written off?
Answer: In the patent account, Amortization Expenses will come in the credit side.
3. Is depreciation a cash expense?
Answer: No, depreciation is not a cash expense.
4. What are the factors affecting depreciation?
Answer: The factors affecting depreciation are: i. The estimated useful life of assets ii. Estimated scrap value iii. Chances to obsolescence iv. Addition to assets v. Legal provision
5. What formula will you use for calculating depreciation using the straight-line method?
Answer: Annual depreciation = Scrap value or residual value or break up or salvage value / Expected or estimated the life of the asset.
Short Answer Type Questions
1. What do you mean by “depreciation”? Jot down some of its features.
Answer: Loss in the value and utility of assets due to their constant use and expiry of time is termed as depreciation. i. Depreciation is loss in the value of assets ii. Loss should be gradual and constant iii. Depreciation is the exhaustion of the effective life of business iv. Depreciation is the normal feature v. Maintenance of assets is not depreciation vi. It is a continuing decrease in the value of assets
2. Enumerate the advantages of the Straight Line Method of calculating depreciation.
Answer: The advantages of the Straight Line Method of calculating depreciation are:
i. Simplicity. This is the simplest method of providing depreciation.
ii. Assets can be completely written off. According to this method, assets can be written off to zero.
iii. Knowledge of total depreciation charged. The amount of total depreciation charged can be easily known by multiplying the yearly amount of depreciation with the number of years, the asset has been used.
iv. Suitable for small firms. The straight-line method is the most suitable method for small firms.
v. Suitable for firms having a large number of old and new machines. The weaknesses of this method are removed if the firm has both old and new machines
vi. Useful for assets having less value. This method is the most suitable for charging depreciation on assets of less value such as furniture, fixture and patents etc.
3. Discuss the merits and demerits of calculating depreciation by Diminishing Balance Method.
Answer: The merits and demerits of calculating depreciation by Diminishing Balance Method are:
Merits: i. Calculation of depreciation is easier as compared to other methods of calculating depreciation except for straight-line method. ii. This method is approved by income tax authorities. iii. It seems logical even to a layman that the value of the asset goes on diminishing year after year, so the depreciation should also be charged on the reducing balances.
Demerits: i. It is very difficult to determine the rate by which the value of the asset could be written down to zero. ii. The amount charged as depreciation is not invested outside the business, so no interest is received. iii. The amount of depreciation goes on declining year after year, whereas the asset is used equally every year.
Long Answer Type Questions
1. Explain the term “depreciation”. Discuss the various methods of calculating depreciation.
Answer: Fixed assets are constantly used in the business. The assets lose their value gradually due to their constant use. Loss in the value and utility of assets due to their constant use and expiry of time is termed as depreciation.
The various methods of calculating depreciation are:
- Fixed instalment method: It is the simplest method of charging depreciation. The original cost of the asset is divided by the estimated life period of the asset.
- Diminishing balance method: Under the diminishing balance method, the value of an asset upon which depreciation is to be calculated goes on diminishing, so the amount of depreciation to be charged every year also goes on declining.
2. State the difference between the fixed instalment and diminishing balance method of calculating depreciation.
Answer: The difference between the fixed instalment and diminishing balance method of calculating depreciation are:
| Bases of Difference | Straight Line Method | Diminishing Balance Method |
| Amount of Depreciation | An equal amount of depreciation is charged every year. | The amount of depreciation goes on reducing year after year. |
| Calculation of Depreciation | Depreciation is calculated on the original cost of the assets. | Depreciation is calculated on the reducing the balance of asset. |
| Zero Level | The value of assets can be written down to zero. | The value of assets cannot be written down to zero. |
| Effect on Profit and Loss Account | The initial years of the life of the asset bear less amount of depreciation and repairs but final years bear the same amount of depreciation but more repairs and maintenance charges. | Every year bears almost the same charges. Depreciation goes on declining, whereas repairs and maintenance charges go on increasing. |
| Suitability | This method is useful for assets of less value such as patents, furniture and fixtures etc. | The method is suitable for assets having a longer life and more value such as land and building, plant and machinery etc. |
| Recognition by Income Tax law | The straight-line method is not recognised by Income Tax law | Written down value method is recognised by Income Tax law. |
3. State the four main causes of providing depreciation.
Answer: The four main causes of providing depreciation are:
i. By constant use: The loss in the value, efficiency and utility of fixed assets due to its constant use is termed as depreciation.
ii. By the expiry of time: The effective life of assets goes on decreasing with the passage of time.
iii. By obsolescence: The old assets will become obsolete due to new inventions, improved techniques and technological advancements.
iv. By depletion: Loss of mineral wealth due to the constant working of mines is also depreciation, but specifically known as ‘depletion.’
v. Permanent fall in price: Though fluctuations in the market value of fixed assets is not recorded in the books, sometimes we have to account for this loss such as permanent fall in the value of investments.
vi. By abnormal factors: Depreciation may also be due to the loss in the value of assets by accidents and damage.
4. Why is calculating depreciation important? What is its impact on Profit and Loss account and balance sheet?
Answer: Calculation of depreciation is important because of the following reasons.
i. The ultimate objective of accounting is to determine the correct net income. This objective will not be achieved unless we account for depreciation in the books of accounts.
ii. Provision for depreciation reduces the value of assets with the amount of depreciation and assets are shown at their true and fair value.
iii. The proper method of depreciation will make the funds available for the purchase of fresh assets.
iv. In the absence of provision for depreciation, the sales price of the commodity will be fixed at lower rates, because the cost of production will also be lower due to the ignorance of depreciation. Profit will thus be reduced.
v. Depreciation is charged out of profit and loss account, so the profit after charging it will be less. Shareholders will get dividend out of this profit.
vi. Provision for depreciation avoids overpayment of income tax.
Practical Questions
Questions
Question 1
A trader purchased a machine for ₹ 80,000 on January 1, 2014. It was decided to charge depreciation at 20% per annum on the original cost of the asset. Calculate the machinery account and depreciation account for 3 years. The accounts were closed on December 31.
Question 2
Ikalo Sema purchased a machine for ₹ 25,000 on January 1, 2011. Its probable useful life was estimated at 10 years and its probable scrap value at the end of that period at ₹ 3,000. It was decided to write off the depreciation by equal annual instalments over the years. Show the machinery account for the first 3 years. (Ans: Depreciation per year: ₹ 2,200; balance of machinery account on 31.12.13: ₹ 18,400)
Question 3
Dimapur Paper Mill purchased a plant for ₹ 35,000 on January 1, 2015 and spent ₹ 2,000 on its installation. The estimated life of the plant is 8 years, after which its break-up value will be only ₹ 5,000. Using the straight line method to calculate the amount of annual depreciation, prepare the plant account for the first 3 years assuming that the accounts were close on December 31. (Ans: Depreciation per year: ₹ 7,000; balance of machinery account on 31.12.17: ₹ 41,000)
Question 4
The original cost of furniture amounted to ₹ 9,000 and was written off at 10% original cost as depreciation at the end of each year. Prepare the ledger account for the first 3 years. Also calculate how the account will appear if 10% was written off on the diminishing balance. (Ans: Closing balance: ₹ 6,300; Straight line method: ₹ 900 per year; Diminishing balance after 3 years: ₹ 6,561)
Question 5
Asenla purchased a plant on January 1, 2009 for ₹ 48,000. She depreciates it every year on December 31, using diminishing balance method at a rate of depreciation of 20%. Show the machinery account and depreciation account for the first 3 years. (Ans: Depreciation: ₹ 9,600 (2009); ₹ 7,680 (2010); ₹ 6,144 (2011); Diminishing balance on 1.1.12: ₹ 24,576)
Question 6
An asset was purchased for ₹ 48,000 on January 1, 2007. The life of the asset was estimated to be 5 years and it was estimated to depreciate at 95% of the cost by the fixed instalment method over that period. Calculate the depreciation and written down value. (Ans: Depreciation: ₹ 9,120; Written down value on 31.12.11: ₹ 2,400)
Question 7
On January 1, 2002, a company purchased a machine for ₹ 3,00,000. Depreciation is charged at 20% p.a. on original cost every year. The machine is sold for ₹ 1,00,000 on November 30. Prepare the machinery account based on the assumption that the books are closed on March 31 every year. (Hint: Depreciation charged during the four years will be ₹ 15,000, ₹ 60,000, ₹ 60,000, and ₹ 40,000, respectively. Loss on sale of machine: ₹ 25,000)
Question 8
Zhenito Zho buys a machine for ₹ 50,000 on July 1, 2009. He decides to depreciate the machine at 10% on December 31, each year. This is based on the cost price for 2009 and the value at the start of the year for the subsequent years. Calculate the machine account for the first 3 years. (Ans: Depreciation for 6 months: ₹ 2,500 (2009); ₹ 4,750 (2010) and ₹ 4,275 (2011); balance of machinery account on 31.12.11: ₹ 38,475)
Question 9
Tizit Textiles purchased a machine for ₹ 90,000 on April 1, 2009. Thereafter, it spent ₹ 6,000 on its carriage and ₹ 4,000 on its erection. The useful life of the machine was estimated to be ₹ 10,000 from the date of purchase and its scrap value after that period was calculated to be ₹ 20,000. Prepare the machine account and depreciation account for the first four years using the fixed instalment method. The accounts are closed on March 31 each year. (Ans: Depreciation ₹ 92,000 (2009); ₹ 84,000 (2010), ₹ 76,000 (2011) and ₹ 68,000 (2012); balance of machinery account on 1.1.13: ₹ 68,000)
Question 10
A purchased a machine for ₹ 2,40,000 on January 1, 2006 and spent ₹ 10,000 on its erection. He bought an additional machinery worth ₹ 1,00,000 on July 1, 2006. A sold the machine purchased on January 1, 2006 at ₹ 1,43,000 on July 1, 2008 and on the same date purchased a new machine for ₹ 2,00,000. Calculate the machinery account for the first 3 calendar years using the straight line method. The depreciation is charged at 5%. [Hint: calendar year indicates that the accounts are closed on December 31, each year.] (Ans: loss on sale of machinery: ₹ 75,750; balance of machinery account: ₹ 2,82,500)
Question 11
A plant purchased for ₹ 60,000 on April 1, 2009 is estimated to have a working life of 10 years. At the end of this period the plant is estimated to be valued at ₹ 20,920. The depreciation is provided at 10% in the diminishing balance method. Calculate the plant account for 4 years. The books are closed on March 31, every year. [Hint: residual balance is ignored when depreciation is calculated under diminishing balance method.] (Ans: balance of plant account on March 31: ₹ 39,366)
Question 12
Angelina Meruno purchased a second-hand machine on April 1, 2013 for ₹ 30,000 and also spent ₹ 4,000 on its repair and ₹ 1,000 on its installation cost. She sold the machine for ₹ 25,000 on October 1, 2015. Prepare the machine account after charging depreciation at 10% p.a., using diminishing balance method. The books are closed on March 31 every year. (Ans: loss on sale of machine: ₹ 1,932)
Question 13
On January 1, 2009, a firm purchased a machine for ₹ 32,000. The plant has an estimated useful life of 5 years, after which the scrap value will be only ₹ 2,000. Using the straight line method calculate the annual depreciation and prepare the plant account for the first 3 years. The accounts are closed on December 31. (Ans: balance of plant account on 31.12.11: ₹ 14,000)
Solutions
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Extras
Additional questions and answers
1. Define obsolescence.
Answer : Obsolescence refers to the situation where new inventions or technological advancements render existing machines and equipment obsolete, even though they may not be completely useless. The firm will have to replace the old machine and equipment with the latest, up-to-date, and newly invented ones.
36. What are the causes of depreciation? Explain each cause briefly.
Answer : The causes of depreciation are:
(i) By constant use: The loss in the value, efficiency, and utility of fixed assets due to its constant use is termed as depreciation.
(ii) By expiry of time: The effective life of assets goes on decreasing with the passage of time. For example, if a lease has been obtained for 20 years for ₹1,00,000, it will lose ₹5,000 of its value at the end of the first year and so on, becoming valueless at the end of the 20th year.
(iii) By obsolescence: The old assets become obsolete due to new inventions, improved techniques, and technological advancements.
(iv) By depletion: Loss of mineral wealth due to constant working of mines is also depreciation, specifically known as ‘depletion’.
(v) Permanent fall in price: Though fluctuations in the market value of fixed assets are not recorded in the books, sometimes a permanent fall in the value of investments must be accounted for.
(vi) By abnormal factors: Depreciation may also occur due to the loss in the value of assets by accidents and damage.
Additional MCQs
1. Depreciation represents a ______ in asset value.
A. Loss
B. Gain
C. Income
D. Asset
Answer: A. Loss
40. Fixed asset depreciation is mandated by standards issued by ______.
A. ICAI
B. ICMA
C. IRS
D. FASB
Answer: A. ICAI
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