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

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

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Explain the concept of depreciation, its need in accounting, and the causes that lead to it.

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It represents the expired portion of the asset's cost charged against revenue. It is permanent, continuing, and gradual — based on book value, not market value.
Charging depreciation ensures matching of costs and revenue across periods, presents a true and fair financial position (prevents overvaluation of assets), reduces taxable profits, and ensures compliance with law.
Wear and tear due to use or passage of time causes physical deterioration of the asset even when not in active use.
Obsolescence occurs when an asset becomes outdated due to technological advances or market changes, causing a decline in value even if the asset is physically functional.
Expiration of legal rights (e.g., patents and leases) and abnormal factors like fire or floods also contribute to a decline in the value of fixed assets.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 2

Long Form

Compare the Straight Line Method and Written Down Value Method of depreciation on five distinct grounds.

Basis: SLM charges depreciation on original cost each year, while WDV charges it on the net book value (diminishing balance), leading to a declining annual charge.
Annual charge: Under SLM, depreciation is constant (fixed installment) throughout the asset's life; under WDV, it is highest in the first year and reduces progressively.
Total P&L burden: Combined depreciation and repair burden increases over time under SLM; under WDV, it remains nearly equal each year as falling depreciation offsets rising repairs.
Income Tax recognition: SLM is not recognised by the Income Tax Act; WDV is recognised, making it more advantageous from a tax perspective.
Suitability: SLM suits assets with low repair costs and low obsolescence risk (e.g., leasehold buildings); WDV is better for assets with high obsolescence and rising maintenance costs (e.g., machinery, vehicles).

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 3

Long Form

Describe the two methods of recording depreciation in the books of account, including journal entries and balance sheet treatment for each.

Method 1 — Charging to Asset Account: Depreciation is credited to the asset account and debited to Profit and Loss Account each year. Entry: Depreciation A/c Dr. To Asset A/c; Profit and Loss A/c Dr. To Depreciation A/c.
Balance sheet treatment under Method 1: The fixed asset appears at its net book value (original cost minus cumulative depreciation) on the assets side.
Method 2 — Provision for Depreciation Account: Depreciation is credited to a separate Provision for Depreciation Account and debited to Profit and Loss Account. The asset account remains undisturbed at original cost. Entry: Depreciation A/c Dr. To Provision for Depreciation A/c; P&L A/c Dr. To Depreciation A/c.
Balance sheet treatment under Method 2: The asset appears at original cost; the accumulated provision is shown either as deduction from the asset or on the liabilities side under current liabilities.
At disposal, under Method 2, the provision for depreciation is first transferred back to the asset account before computing profit or loss on sale. An Asset Disposal Account may also be used to consolidate all disposal transactions.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 4

Long Form

Analyse the factors that determine the amount of depreciation charged on a fixed asset.

Cost of asset: Includes purchase price plus all expenses incurred to bring the asset to working condition — freight, installation, transit insurance, registration, and initial repairs for second-hand assets.
Net residual value: The estimated sale proceeds at end of useful life less disposal costs. This is deducted from cost to arrive at the depreciable amount that must be recovered through depreciation.
Depreciable cost: Cost minus net residual value — the total amount to be charged as depreciation over the asset's life. Under-recovery violates the matching principle.
Estimated useful life: The economic or commercial life (not physical life) of the asset. It depends on usage level, maintenance policy, technological obsolescence, legal limits, and number of shifts the asset is operated.
Method of depreciation selected: SLM distributes depreciable cost equally; WDV charges more in early years. The selected method, once applied, must be used consistently as per AS-6.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 5

Long Form

Critically analyse the Straight Line Method of depreciation — its formula, advantages, and limitations.

Formula: Annual Depreciation = (Cost of Asset - Net Residual Value) / Estimated Useful Life. Rate of depreciation = (Annual Depreciation / Cost) x 100. The amount is fixed and identical each year.
Advantage 1: Simple to understand and apply; the fixed annual charge makes profit comparison across years straightforward.
Advantage 2: The full depreciable cost can be recovered — the asset can be written down to zero or scrap value, unlike WDV.
Limitation 1: The assumption of equal utility in every year is unrealistic — older assets provide less service and incur higher repairs, yet the same depreciation amount is charged.
Limitation 2: Total burden on Profit and Loss Account (depreciation plus repairs) increases in later years, making it an unequal and rising charge against profits over time.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 6

Long Form

Critically examine the Written Down Value Method of depreciation — its formula, suitability, advantages, and limitations.

Formula: Depreciation is charged at a fixed percentage on the opening book value each year. Rate: r = [1 - (s/c)^(1/n)] x 100, where s = scrap value, c = cost, n = useful life. The depreciation amount declines each year.
Advantage 1: More realistic — higher depreciation is charged when the asset is new and productive; lower charge when it is older, matching the pattern of benefit accrual.
Advantage 2: Combined burden of depreciation and repairs remains nearly equal each year — rising repairs offset declining depreciation — ensuring a balanced P&L charge.
Advantage 3: Recognised by the Income Tax Act, providing tax benefits. Also, heavy early write-off reduces risk from obsolescence.
Limitation: The book value can never reach zero — depreciable cost cannot be fully recovered. Additionally, it is difficult to determine an appropriate rate of depreciation.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 7

Long Form

Distinguish between provisions and reserves on six grounds and explain their treatment in the balance sheet.

Nature: Provision is a charge against profit (deducted before net profit); reserve is an appropriation of profit (created after net profit is ascertained).
Purpose: Provision is for a known liability or expense of uncertain amount in the current period; reserve is to strengthen financial position or meet future contingencies.
Compulsion: Provision must be created even without profits (mandatory); reserve is generally discretionary and requires profits to exist.
Tax effect: Provision reduces taxable profits; reserve has no effect on taxable profits as it is created from post-tax profit.
Dividend: Provision cannot be used for dividend distribution; general reserve can be freely distributed as dividend.
Balance sheet: Provisions are shown as deductions from the related asset or under current liabilities; reserves are shown on the liabilities side under 'Reserves and Surplus' after capital.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 8

Long Form

Explain the different types of reserves with examples of each type.

General Reserve: Created without any specific purpose; freely usable by management for any purpose including dividend. Strengthens overall financial position of the business.
Specific Reserve: Created for a defined purpose and usable only for that purpose. Examples — Dividend Equalisation Reserve (to stabilise dividends), Debenture Redemption Reserve (for repaying debentures), Workmen Compensation Fund, Investment Fluctuation Fund.
Revenue Reserve: Created from revenue profits (from normal operations), available for dividend distribution. Examples include General Reserve, Dividend Equalisation Reserve, and Debenture Redemption Reserve.
Capital Reserve: Created from capital profits not arising from normal operations. Not distributable as dividend. Examples — premium on issue of shares, profit on sale of fixed assets, profit prior to incorporation, profit on revaluation of assets.
Secret Reserve: Does not appear in the balance sheet; created by excess depreciation, undervaluation of stock, or excessive provisions. Reduces disclosed profits and is not visible to outsiders.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 9

Long Form

Discuss the concept of a secret reserve — how it is created, its effects, and whether its creation is justifiable.

A secret reserve is a reserve that does not appear in the balance sheet and is unknown to external stakeholders. It arises when assets are undervalued or liabilities are overstated.
Methods of creation: Charging higher depreciation than required; undervaluation of inventories/stock; charging capital expenditure to P&L Account; making excessive provision for doubtful debts; showing contingent liabilities as actual liabilities.
Effect: Secret reserves reduce disclosed profits and tax liability, and can be merged with profits in lean periods to present improved financial results to stakeholders.
Justification: Creation within reasonable limits may be justified on grounds of prudence (conservatism), business expediency, and preventing competitors from gaining insight into the firm's true profitability.
Criticism: Excessive secret reserves mislead investors, creditors, and other stakeholders about the true financial position and actual profitability of the business, reducing transparency.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 10

Long Form

Explain the accounting treatment for provisions with reference to Provision for Doubtful Debts, including journal entries and balance sheet presentation.

Provision for Doubtful Debts is created to provide for the expected loss from debtors who may not pay, based on past experience. It is calculated as a percentage of sundry debtors after writing off known bad debts.
Step 1 — Write off confirmed bad debts: Bad Debts A/c Dr. To Sundry Debtors A/c. Then transfer to P&L: P&L A/c Dr. To Bad Debts A/c.
Step 2 — Create fresh provision: P&L A/c Dr. To Provision for Doubtful Debts A/c (at required percentage of remaining debtors, adjusted for existing provision balance).
If existing provision exceeds the required amount, excess is credited back to P&L. If short, the shortfall is debited to P&L.
Balance sheet presentation: Provision for Doubtful Debts is shown as a deduction from Sundry Debtors on the assets side, presenting the net expected realisable amount.

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

Explain the concept of depreciation, its need in accounting, and the causes that lead to it.

Compare the Straight Line Method and Written Down Value Method of depreciation on five distinct grounds.

Describe the two methods of recording depreciation in the books of account, including journal entries and balance sheet treatment for each.

Analyse the factors that determine the amount of depreciation charged on a fixed asset.

Critically analyse the Straight Line Method of depreciation — its formula, advantages, and limitations.

Critically examine the Written Down Value Method of depreciation — its formula, suitability, advantages, and limitations.

Distinguish between provisions and reserves on six grounds and explain their treatment in the balance sheet.

Explain the different types of reserves with examples of each type.

Discuss the concept of a secret reserve — how it is created, its effects, and whether its creation is justifiable.

Explain the accounting treatment for provisions with reference to Provision for Doubtful Debts, including journal entries and balance sheet presentation.

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