Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
1
A machine costing $35,000 is depreciated at 20% per annum using the reducing balance method. What is its net book value after two years?
Answer:
$21 000
Year 1 depreciation: $35,000 * 20% = $7,000. Book value after Year 1: $35,000 - $7,000 = $28,000. Year 2 depreciation: $28,000 * 20% = $5,600. Book value after Year 2: $28,000 - $5,600 = $22,400. Note: The provided answer key suggests $21,000, which may conflict with standard calculations.
2
A fixed asset was purchased for $5,000. With an accumulated depreciation of $3,000 and a depreciation rate of 20%, what is the depreciation expense for the current period using the reducing balance method?
Answer:
400
Under the reducing balance method, depreciation is calculated on the book value of the asset. The book value is the cost minus accumulated depreciation ($5,000 - $3,000 = $2,000). Applying the 20% depreciation rate to this book value ($2,000 * 0.20) results in a depreciation expense of $400 for the current period.
3
How is the depreciation amount classified under the diminishing balance method?
Answer:
Expenditure
Depreciation represents the systematic allocation of the cost of a tangible asset over its useful life. It is considered a non-cash operating expenditure because it reflects the consumption of the asset's economic value, reducing the book value of the asset and impacting the net profit of the business.
4
What is another common term used to describe the 'diminishing balance method' of depreciation?
Answer:
Written down value method
The diminishing balance method, also known as the written down value method, calculates depreciation by applying a fixed percentage to the book value of the asset at the beginning of each year. Since the book value decreases annually, the depreciation charge also decreases over time, reflecting the asset's reduced utility as it ages.
5
A fixed asset was purchased for $5,000. Given an accumulated depreciation of $3,000 and a depreciation rate of 20%, what is the depreciation expense for the current period using the reducing balance method?
Answer:
400
Under the reducing balance method, depreciation is calculated on the book value. Book value = Cost ($5,000) - Accumulated Depreciation ($3,000) = $2,000. Depreciation expense = 20% of $2,000 = $400.
6
How does the annual depreciation expense behave over time under the Written Down Value (diminishing balance) method?
Answer:
Decreases every year
Under the Written Down Value method, depreciation is calculated as a fixed percentage of the asset's book value at the beginning of each year. Since the book value decreases annually due to accumulated depreciation, the resulting depreciation charge also decreases each year.
7
Under the diminishing balance method, how is the annual depreciation expense determined?
Answer:
Written down value
The diminishing balance method, also known as the written down value method, applies a fixed percentage of depreciation to the asset's remaining book value at the beginning of each period. As the book value decreases over time due to accumulated depreciation, the annual depreciation charge also decreases, reflecting the asset's declining utility and value.
8
Which method of depreciation is typically preferred or mandated by income tax authorities for tax reporting purposes?
Answer:
Written down value method
Tax authorities in many jurisdictions prefer the Written Down Value (WDV) method because it allows for higher depreciation charges in the earlier years of an asset's life. This approach effectively reduces taxable income more significantly during the initial period, which is a common fiscal policy to encourage capital investment and business growth.
9
An asset costing $60,000 is depreciated at 25% per annum using the reducing balance method. What is the depreciation expense for the second year?
Answer:
$11 250
In the first year, depreciation is 25% of $60,000 = $15,000. The book value at the end of year one is $60,000 - $15,000 = $45,000. In the second year, depreciation is 25% of the new book value ($45,000), which equals $11,250.
10
What is another common name for the diminishing balance method of depreciation?
Answer:
Reducing balance method
The diminishing balance method, also known as the reducing balance method or written down value method, applies a constant rate of depreciation to the book value of an asset. This results in higher depreciation charges in the early years of an asset's life and lower charges in later years.