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

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

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Ramesh Traders purchased a machine on April 01, 2020 for ₹2,00,000 and spent ₹20,000 on its installation and ₹5,000 on transportation. The management estimated that the machine would have a useful life of 10 years and a scrap value of ₹25,000 at the end of its useful life. The accountant was asked to calculate depreciation using the Straight Line Method and pass necessary journal entries. The firm closes its books on March 31 every year. The machine was put to use immediately after installation.

Question 1: What is the original (historical) cost of the machine purchased by Ramesh Traders?

Original cost = Purchase price + Installation charges + Transportation charges
Original cost = ₹2,00,000 + ₹20,000 + ₹5,000 = ₹2,25,000

Question 2: Calculate the annual depreciation amount and the rate of depreciation under the Straight Line Method for the machine purchased by Ramesh Traders.

Depreciable cost = ₹2,25,000 – ₹25,000 = ₹2,00,000
Annual depreciation = ₹2,00,000 ÷ 10 = ₹20,000 per year; Rate of depreciation = (₹20,000 ÷ ₹2,25,000) × 100 ≈ 8.89% on original cost

Question 3: Prepare the journal entries for the first year (2020-21) and explain the balance sheet treatment when depreciation is charged directly to the asset account.

On purchase: Machine A/c Dr. ₹2,25,000 / To Bank A/c ₹2,25,000
Year-end: Depreciation A/c Dr. ₹20,000 / To Machine A/c ₹20,000; Profit & Loss A/c Dr. ₹20,000 / To Depreciation A/c ₹20,000
Balance sheet treatment: Machine appears at net book value (₹2,25,000 – ₹20,000 = ₹2,05,000) on the asset side, not at original cost

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Sharma Enterprises bought a delivery truck on October 01, 2021 for ₹9,00,000. The company decided to charge depreciation @ 20% per annum using the Written Down Value (WDV) method. The firm's financial year closes on March 31 every year. In the second year, the management noticed that repairs expenses were rising but the total charge to profit and loss account remained fairly stable. The accountant explained that this is one of the key advantages of the WDV method over the Straight Line Method.

Question 1: Calculate the depreciation charged for the first two financial years (2021-22 and 2022-23) under the Written Down Value method.

2021-22: Depreciation = 20% of ₹9,00,000 for 6 months = ₹90,000
2022-23: WDV = ₹9,00,000 – ₹90,000 = ₹8,10,000; Depreciation = 20% of ₹8,10,000 = ₹1,62,000

Question 2: Why does the Written Down Value method result in a more stable total charge to profit and loss account compared to the Straight Line Method?

Under WDV, depreciation decreases year after year as it is charged on reducing book value
Repair and maintenance expenses increase in later years; the decline in depreciation offsets the rise in repairs, keeping the total charge (depreciation + repairs) roughly equal each year

Question 3: Compare the Straight Line Method and Written Down Value Method on the basis of: (i) basis of charging depreciation, (ii) recognition by Income Tax Law, and (iii) suitability.

SLM charges depreciation on original cost (fixed amount); WDV charges on net book value (decreasing amount)
SLM is not recognised by Income Tax Law; WDV is recognised by Income Tax Law
SLM is suitable for assets with low repair costs and low obsolescence risk (e.g., leasehold buildings); WDV is suitable for assets affected by technological changes and rising repairs (e.g., machinery, vehicles)

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M/s Gupta & Co. maintains a Provision for Depreciation account separately instead of charging depreciation directly to the asset account. They purchased machinery for ₹5,00,000 on April 01, 2019. Depreciation is charged @ 10% per annum on the Straight Line Method. After three years, the machinery was sold for ₹3,80,000. The accountant prepared a Machinery Disposal Account to record the transaction. The firm closes its books on March 31 every year.

Question 1: What is the accumulated depreciation on the machinery after three years?

Annual depreciation = 10% of ₹5,00,000 = ₹50,000
Accumulated depreciation over 3 years = ₹50,000 × 3 = ₹1,50,000

Question 2: How does the machinery appear in the Balance Sheet when Provision for Depreciation account is maintained? State the two alternative presentations.

The machinery continues to appear at its original cost (₹5,00,000) on the asset side of the balance sheet
The provision for depreciation (₹1,50,000) is shown either as a deduction from the asset on the asset side, or on the liabilities side of the balance sheet

Question 3: Prepare the Machinery Disposal Account showing the profit or loss on sale after three years. Pass the necessary journal entries to close the Provision for Depreciation account and record the sale.

Provision for Depreciation A/c Dr. ₹1,50,000 / To Machinery Disposal A/c ₹1,50,000; Machinery Disposal A/c Dr. ₹5,00,000 / To Machinery A/c ₹5,00,000; Bank A/c Dr. ₹3,80,000 / To Machinery Disposal A/c ₹3,80,000
Machinery Disposal A/c: Dr side = ₹5,00,000 (cost); Cr side = ₹1,50,000 (provision) + ₹3,80,000 (bank) = ₹5,30,000; Profit on sale = ₹30,000
Entry: Machinery Disposal A/c Dr. ₹30,000 / To Profit and Loss A/c ₹30,000 (profit on sale)

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Anand Industries purchased a coal mine for ₹10,00,000 to extract coal. Over a period of 5 years, the extraction of coal reduced the available quantity significantly. Separately, the company also holds patents for a unique manufacturing process, purchased for ₹5,00,000 with a legal life of 10 years. The company's accountant explained to the board that different terms are used for different types of assets even though all result in reducing the book value of assets over time. The board found it difficult to distinguish between depreciation, depletion, and amortisation.

Question 1: What term is used for the reduction in value of the coal mine, and why is it different from depreciation?

The term used is 'Depletion'
Depletion refers to exhaustion of natural/economic resources (like mines, quarries) due to extraction, while depreciation relates to reduction in value due to use, passage of time, or obsolescence of tangible fixed assets

Question 2: How much should be written off as amortisation for the patent each year, and what is the accounting treatment for amortisation?

Annual amortisation = ₹5,00,000 ÷ 10 = ₹50,000 per year
Amortisation is treated similarly to depreciation — it is charged to the profit and loss account as an expense each year, reducing the book value of the intangible asset

Question 3: Distinguish between depreciation, depletion, and amortisation with reference to the type of assets involved and the cause of reduction in value.

Depreciation: applies to tangible fixed assets (machinery, buildings); reduction due to use, passage of time, or obsolescence
Depletion: applies to natural resources (mines, quarries, oil fields); reduction due to extraction/exhaustion of the physical quantity of the resource
Amortisation: applies to intangible assets (patents, copyrights, goodwill, trademarks); reduction due to expiry of legal or contractual rights over a predetermined period; all three receive similar accounting treatment despite different assets

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Case Set 5

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Kaveri Traders sells goods on credit. By the end of March 31, 2023, its Sundry Debtors stood at ₹80,000. Bad debts known but not recorded amounted to ₹5,000. The business has a policy of maintaining a Provision for Doubtful Debts at 5% of debtors. The existing balance in Provision for Doubtful Debts account was ₹2,500. The accountant is required to prepare the provision for doubtful debts account and show the profit and loss account impact. The firm follows the prudence concept strictly.

Question 1: What is the net amount of debtors on which the new provision for doubtful debts will be calculated?

Debtors after writing off bad debts = ₹80,000 – ₹5,000 = ₹75,000
New provision required = 5% of ₹75,000 = ₹3,750

Question 2: Prepare the journal entry for writing off the known bad debts and creating the required provision for doubtful debts.

Bad Debts A/c Dr. ₹5,000 / To Sundry Debtors A/c ₹5,000 (writing off known bad debts)
Profit & Loss A/c Dr. ₹6,250 / To Provision for Doubtful Debts A/c ₹1,250 (additional provision needed: ₹3,750 – ₹2,500 = ₹1,250, plus bad debts ₹5,000 transferred to P&L)

Question 3: Explain the accounting principle underlying the creation of Provision for Doubtful Debts and differentiate between 'Bad Debts' and 'Doubtful Debts'.

The creation of Provision for Doubtful Debts is based on the Prudence (Conservatism) principle — anticipated losses must be accounted for even if the exact amount is uncertain
Bad Debts are debtors from whom collection is impossible — these are definite losses written off; Doubtful Debts are debtors from whom collection is uncertain but may occur partially
Provision is a charge against profit and ensures matching of revenue and expenses for the period; it is shown as a deduction from Sundry Debtors on the balance sheet

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

Passage

Question 1: What is the original (historical) cost of the machine purchased by Ramesh Traders?

Question 2: Calculate the annual depreciation amount and the rate of depreciation under the Straight Line Method for the machine purchased by Ramesh Traders.

Question 3: Prepare the journal entries for the first year (2020-21) and explain the balance sheet treatment when depreciation is charged directly to the asset account.

Passage

Question 1: Calculate the depreciation charged for the first two financial years (2021-22 and 2022-23) under the Written Down Value method.

Question 2: Why does the Written Down Value method result in a more stable total charge to profit and loss account compared to the Straight Line Method?

Question 3: Compare the Straight Line Method and Written Down Value Method on the basis of: (i) basis of charging depreciation, (ii) recognition by Income Tax Law, and (iii) suitability.

Passage

Question 1: What is the accumulated depreciation on the machinery after three years?

Question 2: How does the machinery appear in the Balance Sheet when Provision for Depreciation account is maintained? State the two alternative presentations.

Question 3: Prepare the Machinery Disposal Account showing the profit or loss on sale after three years. Pass the necessary journal entries to close the Provision for Depreciation account and record the sale.

Passage

Question 1: What term is used for the reduction in value of the coal mine, and why is it different from depreciation?

Question 2: How much should be written off as amortisation for the patent each year, and what is the accounting treatment for amortisation?

Question 3: Distinguish between depreciation, depletion, and amortisation with reference to the type of assets involved and the cause of reduction in value.

Passage

Question 1: What is the net amount of debtors on which the new provision for doubtful debts will be calculated?

Question 2: Prepare the journal entry for writing off the known bad debts and creating the required provision for doubtful debts.

Question 3: Explain the accounting principle underlying the creation of Provision for Doubtful Debts and differentiate between 'Bad Debts' and 'Doubtful Debts'.

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