Accounting for Depreciation Revision Questions

Accounting for Depreciation Revision Questions

1)  To which one of the following categories does depreciation belong?

1. Asset
2. Liability
3. Expense
4. Capital

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2)  Which one of the following sets of data is necessary to apply the Straight Line method?

1. Scrap value, and initial cost
2. Initial value, life of asset and residual value
3. Initial value, and life of asset
4. Life of asset and scrap value

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3)  Your van costs £15,000.  It is expected to have a life of six years and a residual value of £3,000.  Which one of the following shows the straight line annual depreciation?

1. £2,500
2. £2,000
3. £2,400
4. None of these

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4)  The Reducing Balance method of measuring depreciation is more accurate than the Straight Line method.

1. True
2. False

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5)  Which one of the following terms is used to describe the current value of a fixed asset in the Balance Sheet?

1. Market value
2. Gross value
3. Net book value
4. Real value

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6)  Your machine cost £20,000.  You estimate that it will depreciate at 20% per annum.  Which one of the following shows its value after four years?

1. £9,030
2. £8,192
3. £8,256
4. £8,524

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7)  An asset costs £10,000 and has a life of five years and a residual value of £1,000.  Which one of the following statements reflects the monthly accounting process correctly?

1. Vehicles is debited with £150 and Depreciation is credited with £150
2. Vehicles is debited with £200 and Depreciation is credited with £200
3. Vehicles is credited with £150 and Depreciation is debited with £150
4. None of these

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8)  When you account for depreciation, which one of the following statements is true?

1. Gross profit is less than it would be without depreciation
2. The Balance Sheet is not affected
3. The business has less cash than it would have without depreciation
4. Net profit is less than it would be without depreciation

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9)  Depreciation is recorded as an expense in the Profit and Loss report because it involves a cash outflow from the business.

1. True
2. False

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Accounting for Depreciation Revision Answers

1)  Option (c) is correct.  Depreciation is an expense to the business.

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2)  Option (b) is correct.  The initial value, less the residual value is the cost that is then distributed over the life of the asset.  It is necessary to have these three pieces of information in order to carry out the calculation.

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3)  Option (b) is correct.  The cost to be distributed over six years is £12,000.

    £12,000 ÷ 6 = £2,000 per annum.

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4)  Option (b) is correct.  This is false.  These methods offer different approaches to depreciation, but one is not more accurate than the other.  The method used is a matter of choice.

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5)  Option (c) is correct.  The current value is called the Net Book Value (NBV).

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6)  Option (b) is correct.

    £20,000 - 20% = £16,000 (NBV after 1 year)
    £16,000 - 20% = £12,800 (NBV after 2 years)
    £12,800 - 20% = £10,240 (NBV after 3 years)
    £10,240 - 20% = £8,192 (NBV after 4 years)

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7)  Option (c) is correct.  

    We are told the asset has an initial cost of £10,000 but after five years has a
    residual value of £1,000.

    Therefore £10,000 - £1,000 = £9,000 depreciation over 5 years.
    Therefore £9,000 ÷ 60 (months in 5 years) = £150 per month.

    The Vehicles account is decreasing in value, so it is credited.  The Depreciation account
    is increasing in value, so it is debited.

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8)  Option (d) is correct.  Depreciation is an expense, and affects Net profit.  It does not affect Gross profit.  Depreciation does not involve a cash outflow.

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9)  Option (b) is correct.  This is false.  Depreciation is an expense, and affects Net profit, but depreciation does not involve a cash outflow.

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