20 Lecture

1. Which of the following is a method of calculating depreciation on fixed assets? a) Straight-line method b) Perpetual inventory method c) FIFO method d) LIFO method

Answer: a) Straight-line method

2. What is the purpose of charging depreciation on fixed assets? a) To calculate the value of the asset at the end of its useful life b) To allocate the cost of the asset over its useful life c) To determine the market value of the asset d) To adjust the value of the asset for inflation

Answer: b) To allocate the cost of the asset over its useful life

3. Which of the following is not a factor that affects the calculation of depreciation? a) The cost of the asset b) The useful life of the asset c) The market value of the asset d) The salvage value of the asset

Answer: c) The market value of the asset

4. How is the book value of a fixed asset calculated? a) Cost of the asset minus accumulated depreciation b) Cost of the asset plus accumulated depreciation c) Market value of the asset minus accumulated depreciation d) Market value of the asset plus accumulated depreciation

Answer: a) Cost of the asset minus accumulated depreciation

5. Which of the following methods of depreciation is best suited for assets that have a high rate of obsolescence? a) Straight-line method b) Units of production method c) Declining balance method d) Sum of years' digits method

Answer: c) Declining balance method

6. When disposing of a fixed asset, how is the gain or loss on disposal calculated? a) By subtracting the book value from the selling price b) By subtracting the selling price from the book value c) By adding the selling price to the book value d) By adding the book value to the selling price

Answer: a) By subtracting the book value from the selling price

7. What happens if the selling price of a fixed asset is greater than its book value? a) A gain on disposal is recorded b) A loss on disposal is recorded c) The asset is revalued upwards d) The asset is revalued downwards

Answer: a) A gain on disposal is recorded

8. Which of the following is not a method of disposing of a fixed asset? a) Sale b) Exchange c) Abandonment d) Depreciation

Answer: d) Depreciation

9. What is the tax treatment of gains and losses on the disposal of fixed assets? a) Gains are taxable, and losses are tax-deductible b) Gains and losses are not taxable or tax-deductible c) Gains and losses are both taxable and tax-deductible d) Gains are not taxable, and losses are tax-deductible

Answer: a) Gains are taxable, and losses are tax-deductible

10. Which of the following is not a reason for disposing of a fixed asset? a) The asset has become obsolete b) The asset is no longer needed c) The asset has reached the end of its useful life d) The asset's book value has increased

Answer: d) The asset's book value has increased

1. What is depreciation, and why is it charged on fixed assets? Answer: Depreciation is the decrease in the value of fixed assets due to wear and tear, obsolescence, and aging. It is charged to spread the cost of the asset over its useful life.

2. What is the straight-line method of depreciation, and how is it calculated? Answer: The straight-line method charges a constant amount of depreciation over the useful life of the asset. It is calculated by dividing the cost of the asset by its useful life.

3. What is the reducing balance method of depreciation, and how is it calculated? Answer: The reducing balance method charges a higher amount of depreciation in the early years of the asset's life, and then reduces the amount as the asset gets older. It is calculated by applying a fixed rate to the net book value of the asset.

4. What is the double-declining balance method of depreciation, and how is it calculated? Answer: The double-declining balance method charges a higher rate of depreciation in the early years of the asset's life, and then reduces the rate as the asset gets older. It is calculated by multiplying the net book value of the asset by a fixed rate.

5. What is meant by salvage value, and how is it used in calculating depreciation? Answer: Salvage value is the estimated value of the asset at the end of its useful life. It is used to calculate the depreciable value of the asset, which is the cost of the asset minus its salvage value.

6. What is the effect of disposing of a fixed asset before the end of its useful life? Answer: If a fixed asset is disposed of before the end of its useful life, then any remaining balance of the asset's cost that has not yet been depreciated must be written off as an expense in the period of disposal.

7. How is depreciation calculated when a fixed asset is acquired partway through an accounting period? Answer: Depreciation is calculated based on the number of months the asset is owned during the accounting period. The annual depreciation charge is prorated for the number of months owned.

8. What is the difference between capital expenditure and revenue expenditure, and how does it affect the depreciation of fixed assets? Answer: Capital expenditure is an expenditure that creates a new asset or extends the useful life of an existing asset, while revenue expenditure is an expense that is incurred to maintain or operate an existing asset. Only capital expenditure is eligible for depreciation.

9. How is the disposal of a fixed asset recorded in the accounting records? Answer: The disposal of a fixed asset is recorded by debiting the accumulated depreciation account for the asset and crediting the asset account for its cost. Any proceeds received from the disposal are credited to a gain or loss account.

10. How does the choice of depreciation method affect the amount of depreciation charged to fixed assets? Answer: The choice of depreciation method affects the amount of depreciation charged to fixed assets by changing the amount charged in each accounting period. Different methods result in different patterns of depreciation charges over the useful life of the asset.

Depreciation on purchase and disposal of fixed assets refers to the calculation of depreciation when a company buys or sells an asset. When a company purchases a fixed asset, it is added to the balance sheet at its cost and is then depreciated over its useful life. The depreciation expense is then recorded on the income statement. Similarly, when a company disposes of a fixed asset, it removes the asset from the balance sheet and records the gain or loss on the sale on the income statement. The book value of the asset is compared to the proceeds from the sale to determine whether a gain or loss has occurred. In the case of a partial sale of an asset, the company must first calculate the accumulated depreciation on the portion of the asset that has been sold. This is done by multiplying the total accumulated depreciation by the percentage of the asset that has been sold. The book value of the asset is then reduced by the accumulated depreciation on the portion sold, and the gain or loss on the sale is calculated based on the proceeds received. It is important for companies to accurately calculate depreciation on purchases and disposals of fixed assets in order to ensure the accuracy of their financial statements. This can also have tax implications, as the calculation of depreciation can affect the amount of taxable income and the tax liability of the company. Overall, proper accounting for the purchase and disposal of fixed assets is essential for maintaining the financial health of a company and ensuring compliance with accounting standards and tax regulations.