📝 Chapter Test

Depreciation, Provisions and Reserves

Take a notebook and pen first. Solve each question yourself, then pick an option. Only your first choice counts in the score, so do not rush.

Score: 0 / 10 Attempted: 0

Part A: MCQ (1 mark each)

Q1. Depreciation is charged on:

Tangible fixed assets
Current assets such as stock
Intangible assets such as patents only
Natural resources such as mines

Depreciation is the decline in value of tangible fixed assets (machinery, furniture, vehicles). Intangibles are amortised and natural resources are depleted.

Q2. The term used for the reduction in value of a coal mine as coal is extracted is:

Depreciation
Amortisation
Depletion
Obsolescence

Depletion is the using up of a natural resource (mines, oil wells, quarries) through extraction.

Q3. A machine is bought for ₹1,10,000 and ₹10,000 is spent on its installation. Its net residual value is ₹20,000 after 5 years. Annual depreciation by the straight line method is:

₹18,000
₹20,000
₹22,000
₹24,000

Cost = 1,10,000 + 10,000 = 1,20,000. Depreciation = (1,20,000 − 20,000) ÷ 5 = ₹20,000.

Q4. An asset costing ₹1,00,000 is depreciated at 10% p.a. by the written down value method. Its book value at the end of the second year will be:

₹80,000
₹81,000
₹90,000
₹82,000

Year 1: 1,00,000 − 10,000 = 90,000. Year 2: 90,000 − 9,000 = ₹81,000.

Q5. When a Provision for Depreciation Account is maintained, the fixed asset appears in the ledger at:

Its written down value
Its market value
Its original cost
Its scrap value

Depreciation is credited to the provision account, so the asset account keeps showing the original cost; the provision is deducted from it in the balance sheet.

Q6. A machine costing ₹80,000 with accumulated depreciation of ₹50,000 is sold for ₹25,000. The Machinery Disposal Account will show:

Profit of ₹5,000
Loss of ₹5,000
Loss of ₹55,000
Profit of ₹25,000

Book value = 80,000 − 50,000 = 30,000. Sale price 25,000 is less, so loss = ₹5,000 (debit side of the disposal account is bigger).

Q7. A provision is:

An appropriation of profit
A charge against profit
Created only when there is profit
Shown under Reserves and Surplus

A provision is debited to the Profit and Loss Account for a known liability or loss of the current year whose amount is uncertain; it must be made even in a loss year.

Q8. Which of the following is a capital profit that goes to capital reserve?

Profit from sale of goods
Commission received
Premium on issue of shares
Interest received on bank deposit

Premium on issue of shares does not arise from normal operating activities, so it is a capital profit and is not available for dividend.

Q9. Assertion–Reason Assertion (A): Under the written down value method, the book value of an asset never becomes zero.
Reason (R): Under this method, depreciation is charged every year at a fixed rate on the reduced (opening) book value.

Both Assertion (A) and Reason (R) are true, and R is the correct explanation of A.
Both Assertion (A) and Reason (R) are true, but R is not the correct explanation of A.
Assertion (A) is true, but Reason (R) is false.
Assertion (A) is false, but Reason (R) is true.

A fixed percentage of a smaller and smaller balance always leaves something behind, so the value keeps falling but never reaches zero. R correctly explains A.

Q10. Assertion–Reason Assertion (A): Creation of a general reserve reduces the taxable profit of the business.
Reason (R): A reserve is an appropriation of profit.

Both Assertion (A) and Reason (R) are true, and R is the correct explanation of A.
Both Assertion (A) and Reason (R) are true, but R is not the correct explanation of A.
Assertion (A) is true, but Reason (R) is false.
Assertion (A) is false, but Reason (R) is true.

A reserve is made out of profit after it is calculated (after tax), so it has no effect on taxable profit; A is false. R is true.

Part B: Exam-style questions

Dost Sir: In accountancy, marks are given for correct accounts, correct amounts, proper format and narration. First write the full answer in your notebook, then press “Show solution” and compare line by line.

Q1.3 marks

Distinguish between the Straight Line Method and the Written Down Value Method of depreciation on any three bases.

I got it right

✍️ Write it like this (board answer)

Basis	Straight Line Method	Written Down Value Method
Base of calculation	Depreciation is calculated on the original cost every year	Depreciation is calculated on the book value (reduced balance) at the start of each year
Amount of depreciation	Same (fixed) amount every year	Amount goes on decreasing year after year
Book value	Can become zero (or equal to scrap value) at the end of useful life	Never becomes zero

(1 mark for each correct basis. Other valid bases: SLM total charge of depreciation + repairs increases over the years, while under WDV it stays nearly equal; income tax law recognises WDV; SLM suits assets like patents and leasehold property, WDV suits plant and machinery and vehicles.)

Q2.3 marks

Distinguish between a provision and a reserve on any three bases.

I got it right

✍️ Write it like this (board answer)

Basis	Provision	Reserve
Basic nature	Charge against profit; debited before net profit is found	Appropriation of profit; made after net profit is found
Effect on taxable profit	Reduces taxable profit	No effect on taxable profit
Presentation in balance sheet	Deducted from the related asset, or shown with current liabilities	Shown on the liabilities side under Reserves and Surplus, after capital

(1 mark for each correct basis. Other valid bases: purpose, element of compulsion (a provision must be made even without profit), use for payment of dividend.)

Q3.4 marks

On 1 July 2026, Arora Printers bought a machine for ₹1,80,000 and spent ₹20,000 on its installation. Its useful life is 10 years and net residual value ₹20,000. Depreciation is charged by the straight line method and charged (credited) to the asset account. Books are closed on 31 March every year. Prepare the Machinery Account for the first three years.

I got it right

✍️ Write it like this (board answer)

Working note: Cost = 1,80,000 + 20,000 = ₹2,00,000. Annual depreciation = (2,00,000 − 20,000) ÷ 10 = ₹18,000. For 2026-27 (July to March, 9 months) = 18,000 × 9/12 = ₹13,500. (1 mark)

Dr.Machinery AccountCr.

Date	Particulars	₹	Date	Particulars	₹
2026 Jul 1	To Bank A/c	1,80,000	2027 Mar 31	By Depreciation A/c	13,500
Jul 1	To Bank A/c (installation)	20,000	Mar 31	By Balance c/d	1,86,500
		2,00,000			2,00,000
2027 Apr 1	To Balance b/d	1,86,500	2028 Mar 31	By Depreciation A/c	18,000
			Mar 31	By Balance c/d	1,68,500
		1,86,500			1,86,500
2028 Apr 1	To Balance b/d	1,68,500	2029 Mar 31	By Depreciation A/c	18,000
			Mar 31	By Balance c/d	1,50,500
		1,68,500			1,68,500
2029 Apr 1	To Balance b/d	1,50,500

(1 mark for each correctly balanced year.)

Q4.4 marks

The trial balance of Singh Hardware on 31 March 2027 shows Sundry Debtors ₹2,50,000. Additional information: (i) further bad debts ₹10,000 are to be written off; (ii) a provision for doubtful debts is to be created at 4% on debtors. Pass the necessary journal entries and show how debtors will appear in the balance sheet.

I got it right

✍️ Write it like this (board answer)

Working note: Debtors after bad debts = 2,50,000 − 10,000 = 2,40,000. Provision = 4% of 2,40,000 = ₹9,600.

Date	Particulars	Dr (₹)	Cr (₹)
2027 Mar 31	Bad Debts A/c Dr.	10,000
	To Sundry Debtors A/c		10,000
	(Being further bad debts written off)
Mar 31	Profit and Loss A/c Dr.	10,000
	To Bad Debts A/c		10,000
	(Being bad debts transferred to Profit and Loss Account)
Mar 31	Profit and Loss A/c Dr.	9,600
	To Provision for Doubtful Debts A/c		9,600
	(Being provision for doubtful debts created at 4%)
	Total	29,600	29,600

Balance sheet (assets side): Sundry Debtors ₹2,40,000 less Provision for Doubtful Debts ₹9,600 = ₹2,30,400. (1 mark for each entry, 1 mark for presentation.)

Q5.6 marks

Rana Traders close their books on 31 March. On 1 April 2026 the Machinery Account showed ₹8,00,000 (Machine A bought on 1 April 2024 for ₹5,00,000 and Machine B bought on 1 April 2025 for ₹3,00,000) and the Provision for Depreciation Account showed ₹1,30,000. Depreciation is charged at 10% p.a. on original cost. On 1 October 2026 Machine A was sold for ₹3,40,000. On 1 January 2027 Machine C was bought for ₹4,00,000. Prepare the Machinery Account, Provision for Depreciation Account and Machinery Disposal Account for 2026-27.

I got it right

✍️ Write it like this (board answer)

Working notes: (1) Depreciation on A till sale: 2024-25 ₹50,000 + 2025-26 ₹50,000 + 6 months of 2026-27 ₹25,000 = ₹1,25,000. Book value = 5,00,000 − 1,25,000 = 3,75,000; sold for 3,40,000 → loss ₹35,000. (2) Depreciation on 31 March 2027: B 3,00,000 × 10% = 30,000; C 4,00,000 × 10% × 3/12 = 10,000; total ₹40,000. (3) Check: closing provision = B 2 years 60,000 + C 10,000 = ₹70,000.

Dr.Machinery AccountCr.

Date	Particulars	₹	Date	Particulars	₹
2026 Apr 1	To Balance b/d	8,00,000	2026 Oct 1	By Machinery Disposal A/c	5,00,000
2027 Jan 1	To Bank A/c (Machine C)	4,00,000	2027 Mar 31	By Balance c/d	7,00,000
		12,00,000			12,00,000

Dr.Provision for Depreciation AccountCr.

Date	Particulars	₹	Date	Particulars	₹
2026 Oct 1	To Machinery Disposal A/c	1,25,000	2026 Apr 1	By Balance b/d	1,30,000
2027 Mar 31	To Balance c/d	70,000	Oct 1	By Depreciation A/c (Machine A, 6 months)	25,000
			2027 Mar 31	By Depreciation A/c	40,000
		1,95,000			1,95,000

Dr.Machinery Disposal AccountCr.

Date	Particulars	₹	Date	Particulars	₹
2026 Oct 1	To Machinery A/c	5,00,000	2026 Oct 1	By Provision for Depreciation A/c	1,25,000
			Oct 1	By Bank A/c (sale)	3,40,000
			Oct 1	By Profit and Loss A/c (loss on sale)	35,000
		5,00,000			5,00,000

(Working notes 1½ marks, Machinery A/c 1½, Provision A/c 1½, Disposal A/c 1½.)

Q6.Case Study · 4 marks

Kavya runs Kavya Mobiles in Aligarh. For 2026-27 her profit before charging depreciation and provisions is ₹3,20,000. Her debtors stand at ₹1,50,000, which includes ₹6,000 due from a customer who has left the city and cannot be traced. She keeps a provision for doubtful debts at 5% of debtors. Her shop furniture cost ₹2,00,000 and is depreciated at 10% p.a. on the straight line method. Her accountant suggests: “Charge 20% depreciation instead, so the profit looks smaller.” Kavya refuses and charges the correct 10%. She then decides to keep 20% of the net profit in the business as General Reserve.

(i) Calculate the amount of bad debts and the provision for doubtful debts. (1)
(ii) Calculate the net profit for the year. (1)
(iii) Calculate the amount transferred to General Reserve and state whether it is a charge against or an appropriation of profit. (1)
(iv) If Kavya had followed the accountant’s suggestion, what would have been created, and of what amount? (1)

I got it right

🏆 Ready for more? Enter the Challenge Zone
4 topper-level HOTS problems for this chapter, with hints and full solutions.