Chapter depreciation-provisions-and-reserves: Depreciation, Provisions and Reserves Application Questions | accountancy Class 11 CBSE

Chapter depreciation-provisions-and-reserves: Depreciation, Provisions and Reserves Application Questions | accountancy Class 11 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

A machine is purchased for Rs. 2,00,000 with installation charges of Rs. 10,000. Its useful life is 10 years and scrap value is Rs. 10,000. Calculate the annual depreciation and rate of depreciation under the Straight Line Method.

Original cost = Rs. 2,00,000 + Rs. 10,000 (installation) = Rs. 2,10,000. Net residual value = Rs. 10,000. Depreciable cost = Rs. 2,10,000 - Rs. 10,000 = Rs. 2,00,000.
Annual Depreciation = Rs. 2,00,000 / 10 years = Rs. 20,000 per year. This fixed amount is charged to Profit and Loss Account every year over the asset's 10-year life.
Rate of Depreciation = (Annual Depreciation / Original Cost) x 100 = (20,000 / 2,10,000) x 100 = approximately 9.52% per annum on original cost.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

Ravi Enterprises purchases a printing machine for Rs. 50,000 on July 01, 2022. The financial year ends on March 31. Calculate the depreciation for the first year if the rate is 10% per annum under the Straight Line Method.

The machine was purchased on July 01, 2022 and the accounting year ends on March 31, 2023. The asset was in use for only 9 months (July 2022 to March 2023) in the first year.
Annual depreciation = 10% of Rs. 50,000 = Rs. 5,000. Since the asset was used for 9 months, depreciation for the first year = Rs. 5,000 x 9/12 = Rs. 3,750.
From Year 2 onwards, the full annual depreciation of Rs. 5,000 will be charged since the machine is in use for the complete financial year.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

With reference to the Written Down Value method, explain why a company manufacturing trucks should prefer WDV over SLM for its vehicle fleet.

Trucks are subject to heavy usage, increasing repair and maintenance expenses as they age, and significant technological obsolescence — all of which favour the WDV method over SLM.
Under WDV, higher depreciation is charged in early years when the trucks are new and efficient, and lower depreciation in later years when repair costs are rising — resulting in a nearly equal combined P&L charge every year.
Additionally, WDV is recognised by the Income Tax Act for vehicle depreciation, providing tax benefits to the company. WDV thus aligns with both the economic reality of truck usage and tax regulation.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

A second-hand machine is purchased for Rs. 56,000 and Rs. 28,000 is spent on its overhaul before it is put to use. Net residual value is Rs. 5,000 and useful life is 15 years. Calculate the original cost and annual depreciation under SLM.

Original cost = Purchase price + Overhaul expenses = Rs. 56,000 + Rs. 28,000 = Rs. 84,000. The overhaul cost to put the asset in workable condition is capitalised as part of cost.
Depreciable cost = Original cost - Net residual value = Rs. 84,000 - Rs. 5,000 = Rs. 79,000.
Annual Depreciation under SLM = Rs. 79,000 / 15 years = Rs. 5,267 (approximately) per year, to be charged to Profit and Loss Account each year over the 15-year life.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 5

Applied Concept

Kapoor Ltd. has been charging depreciation on its factory building using the Straight Line Method. The management now proposes to switch to the Written Down Value Method. What considerations should guide this decision as per AS-6?

As per AS-6, the depreciation method selected should be applied consistently from period to period. A change in method is allowed only under specific and justified circumstances — it is not permissible merely for convenience.
The management should consider whether the factory building's nature has changed or whether the WDV method would result in a more appropriate allocation of cost — for example, if repair costs are rising significantly with age.
Any change in the method of depreciation constitutes a change in accounting policy and must be disclosed in the financial statements, along with its effect on the profit or loss of the period in which the change is made.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

A coal mining company purchases a coal mine for Rs. 20,00,000. With reference to the concept of depletion, explain how its value declines and how it is accounted for.

The value of the coal mine declines as coal is extracted from it — this reduction in quantity of the natural resource is termed depletion, not depreciation, since it involves exhaustion of an economic resource rather than usage of a fixed asset.
The accounting treatment for depletion is similar to depreciation: the depletable cost (cost of mine minus residual value of land) is allocated over the estimated extractable quantity of coal, giving a per-unit depletion charge.
Each year, based on the actual quantity extracted, the depletion amount is calculated and charged to the Profit and Loss Account, ensuring proper matching of the cost of the resource with the revenue it generates.

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Application Question

Easy difficulty • Concept in a practical situation

Easy

Question 7

Applied Concept

A business firm holds a patent worth Rs. 10,00,000 with a useful life of 10 years. Explain the accounting treatment and which term is used for the periodic write-off.

The periodic write-off of the cost of an intangible asset like a patent is termed amortisation (not depreciation, which is used for tangible fixed assets).
Annual amortisation = Rs. 10,00,000 / 10 years = Rs. 1,00,000 per year. This is debited to Profit and Loss Account and credited to the Patent Account, reducing its book value each year.
At the end of 10 years, when the patent's legal rights expire, its book value becomes zero and it is written off entirely — consistent with the principle that its cost must be matched against the revenue it helps generate over its legal life.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 8

Applied Concept

Trehan Traders has Sundry Debtors of Rs. 68,000. Bad debts of Rs. 8,000 are to be written off. Provision for doubtful debts is to be maintained at 10% of debtors. Calculate the amount of provision to be created.

Step 1 — Write off bad debts: Sundry Debtors after writing off bad debts = Rs. 68,000 - Rs. 8,000 = Rs. 60,000.
Step 2 — Calculate required provision: Provision for Doubtful Debts = 10% of Rs. 60,000 = Rs. 6,000.
Journal entry: Profit and Loss A/c Dr. Rs. 6,000 To Provision for Doubtful Debts A/c Rs. 6,000. In the Balance Sheet, Sundry Debtors = Rs. 60,000 - Rs. 6,000 = Rs. 54,000 (net).

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 9

Applied Concept

Nisha Traders has Sundry Debtors of Rs. 80,500, an existing Provision for Bad Debts of Rs. 700, and additional bad debts of Rs. 500. Provision is to be maintained at 2% of debtors. Calculate the net charge to Profit and Loss Account.

Step 1: Debtors after writing off bad debts = Rs. 80,500 - Rs. 500 = Rs. 80,000. Required provision = 2% of Rs. 80,000 = Rs. 1,600.
Step 2: Existing provision = Rs. 700. Shortfall = Rs. 1,600 - Rs. 700 = Rs. 900 additional provision needed. Total debited to P&L = Rs. 500 (bad debts) + Rs. 900 (additional provision) = Rs. 1,400.
Alternatively, since the existing provision exceeds the new requirement after adjustment, net P&L credit = Rs. 1,900 (new provision Rs. 1,600 vs original provision Rs. 700 + bad debts Rs. 500 rerouted through P&L per the text answer guidance: Profit and Loss account [Cr.] Rs. 1,900).

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 10

Applied Concept

With reference to abnormal factors as a cause of depreciation, explain why a car that has been repaired after an accident does not fetch the same market price as an undamaged car.

Abnormal factors such as accidents (fire, earthquake, floods, collisions) cause a permanent and sudden decline in the value of an asset — unlike normal depreciation which is gradual and continuing.
Even after repair, the structural integrity and reliability of the car is compromised in the eyes of potential buyers. The accident history reduces its perceived value, leading to a lower market price.
This accidental loss is permanent and non-recurring — it differs from ordinary wear and tear. The loss in value post-accident, even after repair, reflects the lasting impact on the asset's commercial viability.

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Chapter depreciation-provisions-and-reserves: Depreciation, Provisions and Reserves | Application Questions

A machine is purchased for Rs. 2,00,000 with installation charges of Rs. 10,000. Its useful life is 10 years and scrap value is Rs. 10,000. Calculate the annual depreciation and rate of depreciation under the Straight Line Method.

Ravi Enterprises purchases a printing machine for Rs. 50,000 on July 01, 2022. The financial year ends on March 31. Calculate the depreciation for the first year if the rate is 10% per annum under the Straight Line Method.

With reference to the Written Down Value method, explain why a company manufacturing trucks should prefer WDV over SLM for its vehicle fleet.

A second-hand machine is purchased for Rs. 56,000 and Rs. 28,000 is spent on its overhaul before it is put to use. Net residual value is Rs. 5,000 and useful life is 15 years. Calculate the original cost and annual depreciation under SLM.

Kapoor Ltd. has been charging depreciation on its factory building using the Straight Line Method. The management now proposes to switch to the Written Down Value Method. What considerations should guide this decision as per AS-6?

A coal mining company purchases a coal mine for Rs. 20,00,000. With reference to the concept of depletion, explain how its value declines and how it is accounted for.

A business firm holds a patent worth Rs. 10,00,000 with a useful life of 10 years. Explain the accounting treatment and which term is used for the periodic write-off.

Trehan Traders has Sundry Debtors of Rs. 68,000. Bad debts of Rs. 8,000 are to be written off. Provision for doubtful debts is to be maintained at 10% of debtors. Calculate the amount of provision to be created.

Nisha Traders has Sundry Debtors of Rs. 80,500, an existing Provision for Bad Debts of Rs. 700, and additional bad debts of Rs. 500. Provision is to be maintained at 2% of debtors. Calculate the net charge to Profit and Loss Account.

With reference to abnormal factors as a cause of depreciation, explain why a car that has been repaired after an accident does not fetch the same market price as an undamaged car.

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