Depreciation is the term that is used in accountancy and it refers to a constant reduction in the value of fixed assets due to constant usage and normal wear and tear. Depreciation is basically a provision and not an expense and that is why it is also termed as a non-cash expense. Given below are 15 questions on the topic of depreciation which has been segregated into true or false questions, multiple-choice questions, and short questions –
Depreciation True or False Questions
Question –Deprecation is charged on land?
Answer – False, depreciation is not charged on land as although the land is a fixed asset the value of land does not depreciate rather it appreciates over a period of time.
Question –When the market value of an asset and the book value of an asset are equal there is no need for any provision of depreciation?
Answer – False, provision for depreciation has to be made in the books of accounts irrespective of market value or book value of the fixed asset.
Question –An increase in deprecation will not result in a decline in the cash profits of the company?
Answer – True, because depreciation is a non-cash expense and any increase or decrease in the deprecation expense will not have any impact on the cash profits of the company. However, it will lead to lower net profit as far as the overall profit of the company is concerned.
Question –In the case of the straight-line method, the amount of depreciation is lower in the initial years and higher in later years as compared to the written down value method?
Answer – True, because in the case of the straight-line method of depreciation the rate of depreciation is fixed while in the case of the written down value method the depreciation is charged at diminishing value of the asset and not an original value of the asset.
Question –In the case of the written down value method of depreciation, the amount of depreciation remains the same?
Answer – False, in the case of the written down value method the rate of depreciation remains the same but as far as amount is concerned it keeps changing as depreciation is charged on written down value and not the original value of the asset.
Depreciation Multiple Choice Questions
Question –Depreciation is charged on all of the items given below except?
- Plant and Machinery
- Furniture
- Bills Receivables
- Vehicles
Answer – Option C is the correct answer, depreciation is charged only on the fixed assets of the company and bills receivables is a current asset on which no depreciation is charged.
Question –If the value of machinery is $50000 and the company follows the straight-line method of depreciation, assuming useful life of the asset as 5 years and salvage value as $10000 then what will be the yearly depreciation charge
- $10000
- $8000
- $6000
- $4000
Answer- Option B is the correct answer which is calculated as the original value of machine – salvage value of machinery/ useful life of the asset. At the end of 5 years, the value of machinery will be zero using the straight-line method of depreciation.
Question –Which of the following is not a method of depreciation?
- Sum of Digits Method
- Units of Production Method
- Provision for Depreciation Method
- Written Down Value Method
Answer – Option C is the correct answer as there is no method called provision for deprecation method.
Question –What is the correct entry for depreciation?
- Depreciation expense debit and cash account credit
- Accumulated depreciation account debit and fixed asset account credit
- Fixed asset account debit and depreciation account credit
- Depreciation expense debit and accumulated depreciation credit
Answer – Option D is the correct answer.
Question –A company sold car after using it for 5 years at $8000 and the original cost of car was $20000 while the company follows straight line method and the rate of depreciation on the car was 10 percent then how much loss or profit the company made by selling the car at $8000?
- $2000 loss
- $2000 profit
- $4000 loss
- $4000 profit
Answer – Option A is the correct answer because the written down value of car at the end of the 5th year was $10000 ($20000 – 5 year deprecation at $2000 per year) and since the company sold the car at $8000 it incurred $2000 loss.
Depreciation Short Questions
Question –Is depreciation an asset or liability?
Answer – Depreciation is neither asset nor liability rather it is treated as a contra asset account and that is the reason why fixed assets like plant, machinery, furniture, and other depreciable assets are shown at their net book value which is fixed asset less deprecation expense on that fixed asset.
Question –Difference between depreciation and accumulated depreciation?
Answer – Depreciation and accumulated depreciation are different from each other as depreciation is used in the context of single year expense on any fixed asset while accumulated depreciation is the total amount which the company has allocated till now on any fixed asset. Hence for example if the company charges a depreciation of $200 per year on furniture then after 5 years depreciation will be $200 but accumulated depreciation will be $1000.
Question –What is the journal entry of depreciation?
Answer – Depreciation is a non-cash expense and the journal entry for depreciation will be depreciation account debit and accumulated depreciation account credit. Here depreciation is an expense that is why it is debited while accumulated depreciation being contra asset account is credited.
Question –Difference between depreciation and amortization?
Answer – Given below are some of the major differences between depreciation and amortization –
- Depreciation is charged on the fixed assets of the company that includes assets like plant, machinery, furniture, vehicles, and so on while amortization is charged on the intangible assets that include intangibles assets like patents, goodwill, trademarks, and so on.
- In the case of assets that are depreciated, they have resale value at the end of their useful life while assets that are amortized do not have any such resale value.
- In the case of depreciation, the method of depreciation as well as the amount of depreciation keeps changing except for straight-line method but as far as amortization is concerned the amount of amortization will remain the same and not does change.
Question –What are the different types of depreciation methods?
Answer – There are basically 4 types of methods of depreciation that are used by companies to calculated depreciation on fixed assets namely the straight-line method, double-declining balance method, the sum of years method, and units of production method.