Chapter MCQ Test 2 — Depreciation, Provisions and Reserves
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
A machine costs Rs 2,00,000, scrap Rs 20,000, life 9 years (SLM). After 3 years its book value is:
Rs 1,40,000
Rs 1,80,000
Rs 1,00,000
Rs 60,000
Explanation: Annual dep = (2,00,000 − 20,000)/9 = 20,000; after 3 years = 2,00,000 − 60,000 = 1,40,000.
Question 2 of 10
Why does WDV never reduce an asset's book value to exactly zero?
A fixed % of a shrinking balance always leaves a small remainder
WDV adds value
It is illegal to reach zero
Scrap is added back
Explanation: Each year takes a percentage of the remaining value, which keeps approaching but never reaching zero.
Question 3 of 10
An asset (cost 1,00,000, 10% WDV) is sold after 2 years for Rs 78,000. The profit or loss is:
Loss of Rs 3,000
Profit of Rs 3,000
Profit of Rs 78,000
No profit or loss
Explanation: Book value after 2 yrs = 81,000 (100,000→90,000→81,000); sold for 78,000 → loss 3,000.
Question 4 of 10
A firm wants heavier depreciation in the early years to match heavy early obsolescence. It should choose:
WDV method
SLM
No depreciation
Revaluation upward
Explanation: WDV front-loads depreciation, matching assets that lose value quickly early on.
Question 5 of 10
Which statement correctly distinguishes a provision from a reserve?
A provision is a charge against profit; a reserve is an appropriation of profit
Both are appropriations
A reserve is compulsory; a provision is optional
They are identical
Explanation: Provisions are mandatory charges (even in losses); reserves are voluntary appropriations of profit.
Question 6 of 10
Depreciation is added back when computing 'funds from operations' because it is:
A non-cash expense
A cash payment
A reserve
An asset
Explanation: Depreciation reduces profit but involves no cash outflow, so it is added back in fund/cash flow workings.
Question 7 of 10
Under SLM the annual rate of depreciation for a machine of Rs 50,000 charged Rs 7,500 a year is:
15%
7.5%
20%
10%
Explanation: Rate = (7,500 / 50,000) × 100 = 15%.
Question 8 of 10
If a firm forgets to charge depreciation, its profit and assets are:
Both overstated
Both understated
Profit understated, assets overstated
Unaffected
Explanation: Omitting the expense overstates profit, and the un-depreciated asset is overstated in the balance sheet.
Question 9 of 10
A 'specific reserve' differs from a 'general reserve' in that it is:
Created for a particular, named purpose
Larger
A charge against profit
Never disclosed
Explanation: A specific reserve is earmarked for a defined purpose (e.g. dividend equalisation); a general reserve strengthens the firm broadly.
Question 10 of 10
Charging depreciation up to the date of sale BEFORE computing profit/loss on disposal ensures:
The book value used is correct on the sale date
More tax
A bigger sale price
No depreciation is needed
Explanation: Only an up-to-date book value gives the correct gain or loss when compared with the sale proceeds.