Chapter 7 Depreciation Provisions and Reserves Case Study Questions

Please refer to the Chapter 7 Depreciation Provisions and Reserves Case Study Questions with answers provided below. We have provided Case Study Questions for Class 11 Accountancy for all chapters as per CBSE, NCERT and KVS examination guidelines. These case based questions are expected to come in your exams this year. Please practise these case study based Class 11 Accountancy Questions and answers to get more marks in examinations.

Case Study Questions Chapter 7 Depreciation Provisions and Reserves

Case Based Questions

Read the following case study and answer questions 

Arya Ltd. has a manufacturing plant in Delhi. On 1st July, 2021, Arya Ltd purchased a machine for ₹ 1,08,000 and spent ₹ 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 ₹ 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.

Question. 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

Question. 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

Question. What is the original cost of the asset on which depreciation is to be charged?
(a) ₹1,08,000 
(b) ₹12,000
(c) ₹1,20,000
(d) None of these

Question. What is the amount of depreciation charged in the first year?
(a) ₹9,000
(b) ₹10,000
(c) ₹4,500
(d) ₹5,000

Question. 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

Read the following case study and answer question 

M/s XYZ purchased a plant for ₹ 5,00,000 on 1st April, 2017, and spent ₹ 50,000 for its installation. The salvage value of the plant after its useful life of 10 years is estimated to be ₹10,000 . The owner of the firm has certain dilemmas regarding the concept of depreciation. You are required to advise him regarding the same by answering the following questions.

Question. Using which of the following statement would you explain the importance of straight line method of depreciation to owner?
(a) It results into almost equal burden of depreciation and repair expenses taken together every year on profit and loss account
(b) Income Tax Act accept this method for tax purposes
(c) As a large portion of cost is written-off in earlier years, loss due to obsolescence gets reduced
(d) This method makes it possible to distribute full depreciable cost over useful life of the asset

Question. By using which of the following statements would you explain the concept of depreciation to the owner?
(a) Depreciation is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use,effluxion of time or obsolescence through technology and market-change
(b) Depreciation is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use or obsolescence
(c) Depreciation is reduction in the value of assets
(d) None of the above

Question. Using which of the following statement would you explain the importance of written down value method of depreciation to owner? 
(a) This method is suitable for fixed assets which last for long and which require increased repair and maintenance  expenses with passage of time 
(b) Income Tax Act accepts this method for tax purposes
(c) As a large portion of cost is written-off in earlier years, loss due to obsolescence gets reduced
(d) All of the above

Question. Which of the following factors that affect the amount of depreciation would you point out to the owner to keep in mind?
(a) Historical cost of asset
(b) Estimated net residual value
(c) Depreciable cost
(d) All of the above

Question. What will be the amount of depreciation charged annually using straight line method?
(a) ₹50,000
(b) ₹54,000
(c) ₹55,000
(d) None of these

Read the following case study and answer questions 

On 1st April, 2017, X Ltd. purchased a machinery for ₹ 12,00,000. On 1st October, 2019 a part of the machinery purchased on 1st April, 2017 for ₹ 80,000 was sold for ₹ 45,000 and a new machinery at the cost of ₹ 1,58,000 was purchased and installed on the same date. The company has adopted the method of providing 10% p.a. depreciation on the diminishing balance of the machinery. X Ltd. maintains provision for depreciation and machinery disposal account. You are required to answer the following questions.

Question. What is the balance carried in the machinery account in March, 2018?
(a) ₹12,00,000
(b) ₹10,80,000
(c) ₹9,60,000
(d) None of these

Question. Provision for depreciation will be shown as a current asset by X Ltd. in the balance sheet.
(a) True
(b) False
(c) Partially true
(d) Can’t say

Question. What is the accumulated depreciation on the machinery worth ₹ 80,000 that was sold?
(a) ₹8,000
(b) ₹7,200
(c) ₹18,440
(d) None of these

Question. Which of the following points need to be kept in mind when provision for depreciation account is maintained? 
(a) Asset account continues to appear at its original cost year after year over its entire life
(b) Depreciation is accumulated on a separate account instead of being adjusted in the asset account at the end of each accounting period
(c) Both (a) and (b)
(d) None of the above

Question. What is the gain or loss on the sale of machinery worth ₹ 80,000?
(a) ₹16,560 profit
(b) ₹16,560 loss
(c) ₹35,000 loss
(d) ₹35,000 profit

Read the following case study and answer question 

WHERE Ltd. is a manufacturing firm and has a machinery worth ₹ 50,00,000. As on 1st April, 2018 the provision for depreciation  stood at ₹ 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 ₹ 10,00,000 was sold on 1st October, 2018 for  ₹ 6,00,000.

Question. What is the written down value of the machinery sold?
(a) ₹5,76,000
(b) ₹10,00,000
(c) ₹6,40,000
(d) None of these

Question. 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

Question. 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

Question. What is the total depreciation charged on the machinery sold?
(a) ₹4,24,000
(b) ₹3,60,000
(c) ₹4,40,000
(d) None of these

Question. What is the balance carried down in the machinery account?
(a) ₹50,00,000
(b) ₹40,00,000
(c) ₹44,24,000
(d) None of these

Read the following case study and answer question 

Geet has recently started her own cloth trading business. Her business is doing quite well and she is deciding to expand it. She decides to maintain accounts of the firm in proper form as per various legal requirements. She is not really versed with the aspects of accountancy. She is confused what reserves to maintain and what provisions to create. You are a Chartered Accountant. Geet approaches you for advice.

Question. Why should Geet create provisions?
(a) To meet anticipated or known losses and liabilities
(b) To meet unknown losses and liabilities
(c) To hoard funds
(d) None of the above

Question. In the balance sheet, the amount of provision should be shown by Geet as
(i) by way of deduction from the concerned asset on the assets side.
(ii) on the liabilities side of the balance sheet alongwith current liabilities.
(a) Only (i)
(b) Only (ii)
(c) Either (i) or (ii)
(d) Neither (i) nor (ii)

Question. Using which of the following statements will you justify to Geet the need to create reserves?
(a) Reserves help in strengthening the financial position of an enterprise
(b) Reserves help in meeting future contingencies
(c) Reserves are important to expand the business operations and to bring uniformity in distribution of dividends
(d) All of the above

Question. Geet wants to create a reserve which the management can freely utilise for any purpose. Which reserve should she create?
(a) General Reserve
(b) Specific Reserve
(c) Secret Reserve 
(d) None of the above

Question. How will you explain the difference between revenue reserve and capital reserve to Geet? 
(a) Revenue reserve is created out of revenue profits whereas capital reserve is created primarily out of capital profit.
(b) Revenue reserve is created to strengthen the financial position, to meet unforeseen contingencies or for some specific purposes.Whereas capital reserve is created for compliance of legal requirements or accounting practices.
(c) Revenue reserve can be utilised only for a specific purpose whereas Capital reserve can be utilised for any purpose.
(d) Both (a) and (b)