Account Case Study

There are two dentists Dr Sharma and Dr Mehta in your locality who are competitors. Both of them have recently bought an equipment for treatment of patients. They purchased the equipment for ₹ 1,00,000. Dr Sharma has also paid cartage of ₹ 4,000 and spent ₹ 1,000 on its installation. Dr Sharma has decided to write off an equal amount of depreciation every year @ 10% p.a., while Dr Mehta wants to write of a larger amount in earlier years @ 10% p.a.. They have no knowledge about methods of depreciation. On the basis of above information answer the following questions:
1. What is the total cost of equipment for Dr Sharma?
a) ₹ 1,00,000
b) ₹ 1,05,000
c) ₹ 1,04,000
d) ₹ 1,01,000
2. Name the methods which is being followed Dr Mehta?
a) Straight Line Method
b) Written - Down Value Method
c) None of the above
d) Both (a) and (b)
3. Dr Mehta has wisely selected written down value method, reason is –
a) WDV method is recognised by Income tax Laws
b) WDV method helps in recovering the cost of equipment in the initial years
c) Both (a) and (b)
d) None of the above
4. What amount of depreciation Dr Mehta will charge on his equipment in third financial year:
a) ₹ 10,000
b) ₹ 9,000
c) ₹ 8,100
d) ₹ 10,500

WHERE Ltd. is a manufacturing firm and has a machinery worth Rs 50,00,000. As on 1st April, 2018 the provision for depreciation stood at Rs 50,00,000. WHERE Ltd. charges depreciation on machinery at 20% p.a. by the diminishing balance method. A piece of machinery purchased on 1st April, 2016 for Rs 10,00,000 was sold on 1st October, 2018 for Rs 6,00,000.
1. Under written down value method, a fixed and equal amount in the form of depreciation is charged every year during the life time of the asset.
(a) True
(b) False
(c) Can't say
(d) Partially true
2. Which of the following is the probable reason for WHERE Ltd's adoption of written down value method for charging depreciation?
(a) The machinery is such that its repair charges are low
(b) The possibility of obsolescence of machinery is low
(c) The machinery is such that it is affected by technological changes and require more repair expenses with passage of time
(d) None of the above
3. What is the total depreciation charged on the machinery sold?
(a) Rs4,24,000
(b) Rs3,60,000
(c) Rs4,40,000
(d) None of these
4. What is the written down value of the machinery sold?
(a) Rs5,76,000
(b) Rs10,00,000
(c) Rs6,40,000
(d) None of these
5. What is the balance carried down in the machinery account?
(a) Rs50,00,000
(b) Rs40,00,000
(c) Rs44,24,000
(d) None of these

Arya Ltd. has a manufacturing plant in Delhi. On 1st July, 2021, Arya Ltd purchased a machine for Rs 1,08,000 and spent Rs 12,000 on its installation. At the time of purchase, it was estimated that the effective commercial life of the machine will be 12 years after which its salvage value will be Rs 12,000. The machinery is such that the possibility of obsolescence is low and do not require much repair expenses with passage of time. The accounts are closed on 31st December every year.
1. Why should depreciation be charged on the manufacturing plant of Arya Ltd?
(a) For matching of costs and revenue.
(b) To comply with law.
(c) To reflect true and fair financial position.
(d) All of the above
2. Which of the following accounting standard should be followed by Arya Ltd. to charge depreciation?
(a) Accounting Standard-7
(b) Accounting Standard-6
(c) Accounting Standard-8
(d) Accounting Standard-9
3. Which of the following method should be used by Arya Ltd. to charge depreciation?
(a) Written down value method
(b) Straight line method
(c) Insurance policy method
(d) None of the above
4. What is the original cost of the asset on which depreciation is to be charged?
(a) Rs1,08,000
(b) Rs12,000
(c) Rs1,20,000
(d) None of these
5. What is the amount of depreciation charged in the first year?
(a) Rs9,000
(b) Rs10,000
(c) Rs4,500
(d) Rs5,000