🏆 Challenge Zone · Chapter 7 · ⏱ 30 min

Challenge Zone: Depreciation, Provisions and Reserves

Each challenge solved = +25 XP. Solve without a hint = +10 bonus XP. Solve all four to earn the chapter’s Topper badge.

🎯 What you will master here:

Work backwards from a written down value to the original cost
Find profit or loss on sale when an asset is bought and sold mid-year under WDV
Record a sale with provision for depreciation in one compound entry
Handle an accident, an insurance claim and a new purchase in the same year

Welcome to the Chapter 7 topper round! Depreciation questions look like simple percentages, but the marks are lost in the details: how many months, which base, which account. These four challenges pack all those details together. Read every date twice, draw a small timeline, and write your working notes like you would in the board exam. Hints are there if you get stuck, but give each one an honest try first.

🌍 Where is this used in real life?

Every company in India that follows the Companies Act, 2013 charges depreciation using the useful lives given in Schedule II of that Act, and its annual report shows fixed assets at cost with accumulated depreciation deducted, exactly like the provision method you learnt. For income tax, however, the Income Tax Act uses the written down value method on blocks of assets at rates it prescribes, so many businesses keep two depreciation calculations: one for the books and one for the tax return. Accounting software such as Tally keeps a fixed asset register and posts depreciation entries at year end. Auditors (Chartered Accountants) check that provisions for doubtful debts are reasonable, neither too small (hiding losses) nor too large (building secret reserves), and banks look at reserves and surplus before giving a business a loan.

🪄 Accounting magic

Why does the WDV method never reach zero? Each year you keep (100 − rate)% of the opening value. At 10%, after n years the book value is cost × 0.9 × 0.9 × … (n times) = cost × 0.9ⁿ. A positive number multiplied by 0.9 is still positive, however many times you do it. After 3 years: SLM at 10% leaves 70% of cost, WDV at 10% leaves 72.9%. That is also why, to bring an asset down to its scrap value in the same life, the WDV rate must be much higher than the SLM rate. The magic works backwards too: if you know the book value and the rate, cost = book value ÷ 0.9ⁿ.

⭐ Challenge 1 (Level: Tough)

A printer at Sharma Traders is depreciated at 10% p.a. by the written down value method. At the end of its second full year, its book value is ₹64,800. What was its original cost (in ₹)?

After two years, 90% of 90% = 81% of cost remains.

Book value = cost × 0.9 × 0.9 = 0.81 × cost. So cost = 64,800 ÷ 0.81 = ₹80,000. Check: 80,000 − 8,000 = 72,000; 72,000 − 7,200 = 64,800 ✔

⭐⭐ Challenge 2 (Level: Tougher)

Bansal Bakery (books close 31 March) bought a machine on 1 October 2026 for ₹3,00,000 and depreciates it at 20% p.a. on the written down value method. The machine is sold on 30 June 2028 for ₹1,80,000. What is the loss on sale (in ₹)?

Three periods: 6 months in 2026-27, a full year in 2027-28, and 3 months in 2028-29. WDV depreciation in each period is on the opening balance of that year.

2026-27 (6 months): 3,00,000 × 20% × 6/12 = 30,000 → 2,70,000.
2027-28: 2,70,000 × 20% = 54,000 → 2,16,000.
2028-29 (April to June, 3 months): 2,16,000 × 20% × 3/12 = 10,800 → book value 2,05,200.
Loss = 2,05,200 − 1,80,000 = ₹25,200.

⭐⭐ Challenge 3 (Level: Tougher)

A machine costing ₹1,00,000 has accumulated depreciation of ₹70,000 in the Provision for Depreciation Account (up to the date of sale). It is sold for ₹38,000, received by cheque and deposited in the bank. The firm does not use a disposal account. Record the whole sale, including the profit, as one compound entry (two debits, two credits).

The Machinery account must lose its full cost. What else sits on the debit side besides the bank? Is the result a profit or a loss?

Book value = 1,00,000 − 70,000 = 30,000; sold for 38,000, so profit = ₹8,000. The machine’s full cost leaves the Machinery account (credit 1,00,000), its accumulated depreciation leaves the provision (debit 70,000), the bank receives 38,000 (debit) and the profit goes to Profit and Loss (credit 8,000). Debits 1,08,000 = credits 1,08,000.

Particulars	Dr (₹)	Cr (₹)
Bank A/c Dr.	38,000
Provision for Depreciation A/c Dr.	70,000
To Machinery A/c		1,00,000
To Profit and Loss A/c		8,000
(Being machine sold at a profit of ₹8,000)
Total	1,08,000	1,08,000

⭐⭐⭐ Challenge 4 (Level: Topper)

Sethi Transport closes its books on 31 March and charges depreciation at 20% p.a. on original cost (straight line), accumulated in a provision account. On 1 April 2026 it owns 5 vans costing ₹3,00,000 each: 3 bought on 1 April 2024 and 2 bought on 1 October 2025.
1 July 2026: one of the vans bought in 2024 is destroyed in an accident; the insurance company admits a claim of ₹1,20,000.
1 January 2027: a new van is bought for ₹4,00,000.
What is the total amount charged to the Profit and Loss Account for 2026-27 on account of vans (all depreciation for the year + loss on the accident) (in ₹)?

Annual depreciation per old van = ₹60,000. For the destroyed van, add 3 months of 2026-27. At the year end, depreciate the 4 remaining old vans for a full year and the new van for 3 months.

Destroyed van: depreciation till 1 July 2026 = 2 years × 60,000 + 3 months 15,000 = 1,35,000. Book value = 3,00,000 − 1,35,000 = 1,65,000. Claim 1,20,000 → loss 45,000.
Year-end depreciation: 4 old vans 12,00,000 × 20% = 2,40,000; new van 4,00,000 × 20% × 3/12 = 20,000.
Total depreciation 2026-27 = 15,000 + 2,40,000 + 20,000 = 2,75,000.
Total charge to Profit and Loss = 2,75,000 + 45,000 = ₹3,20,000.
(Check of the provision: opening 4,20,000 [3 vans × 2 years × 60,000 = 3,60,000 + 2 vans × 30,000 = 60,000] + 2,75,000 − 1,35,000 = 5,60,000 = 2 vans × 1,80,000 + 2 vans × 90,000 + new van 20,000 ✔)

🧠 Think fast

Two identical machines cost ₹1,00,000 each. One is depreciated at 10% p.a. on SLM, the other at 10% p.a. on WDV. After 3 years:

Both have the same book value
The WDV machine has the higher book value
The SLM machine has the higher book value
The WDV machine has zero book value

SLM leaves 1,00,000 − 3 × 10,000 = ₹70,000. WDV leaves 1,00,000 × 0.9 × 0.9 × 0.9 = ₹72,900. At the same rate WDV charges less after the first year because its base keeps shrinking.

Gupta Stationers made a net loss this year. Which of these must it still create?

General reserve
Dividend equalisation reserve
Provision for doubtful debts
Capital reserve out of trading profit

A provision is a charge against profit for an expected loss, so prudence requires it even in a loss year. Reserves are appropriations of profit and cannot be created when there is no profit.

📌 What toppers remember

Under WDV, book value after n full years = cost × (1 − rate)^n, so cost = book value ÷ (1 − rate)^n; it never reaches zero.
For mid-year purchase and sale, split each year into months used and apply WDV on that year’s opening balance.
Without a disposal account: Bank + Provision for Depreciation Dr.; To Asset (full cost) and To Profit and Loss (profit), or Profit and Loss Dr. for a loss.
Destroyed asset: the admitted insurance claim replaces the sale price; loss = book value − claim.
Total charge to Profit and Loss = depreciation on all assets for the months used + loss on disposal.
Provisions are made even in a loss year; reserves need profit.