Depreciation, Provisions and Reserves (Class 11 Accountancy)

Practise chapter-wise MCQs for Class 11 Accountancy — Depreciation, Provisions and Reserves. Every question comes with the correct answer and an explanatio

Depreciation, Provisions and Reserves (Class 11 Accountancy)

Practise chapter-wise MCQs for Class 11 Accountancy — Depreciation, Provisions and Reserves. Every question comes with the correct answer and an explanatio

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TL;DR: Practise chapter-wise MCQs for Class 11 Accountancy — Depreciation, Provisions and Reserves. Every question comes with the correct answer and an expla…

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Practise chapter-wise MCQs for Class 11 Accountancy — Depreciation, Provisions and Reserves. Every question comes with the correct answer and an explanatio

Depreciation, Provisions and Reserves MCQs with Answers & Explanations

Q1. Which of the following is the primary objective of providing for depreciation?

  1. To reduce the taxable income
  2. To ascertain the true profit or loss for a period ✓ (correct)
  3. To make the financial statements look conservative
  4. To accumulate funds for replacement of the asset

Explanation: Depreciation is an expense that reflects the consumption of the asset's economic benefits over its useful life. Its primary purpose is to match the cost of the asset with the revenue it helps generate, thus ascertaining the true profit or loss for the period.

Q2. What is the main difference between a provision and a reserve?

  1. Provisions are always created at a fixed rate, while reserves can be created at varying rates.
  2. Provisions reduce the profit, while reserves are appropriations of profit.
  3. Provisions are created for ascertained or probable liabilities, while reserves are created out of profits and are not for specific liabilities. ✓ (correct)
  4. Provisions are created for ascertained liabilities, while reserves are created for unascertained liabilities.

Explanation: Provisions are made to meet a liability that is either certain or probable. Reserves, on the other hand, are created from profits for general business purposes or future contingencies and are not for specific known liabilities.

Q3. Which of the following is NOT a revenue reserve?

  1. Dividend Equity Reserve
  2. Retained Earnings
  3. General Reserve
  4. Profit on Sale of Investments ✓ (correct)

Explanation: Profit on Sale of Investments arises from the sale of a capital asset and is generally considered a capital profit, leading to a capital reserve. The other options are typically considered revenue reserves, created from the profits of ordinary business operations.

Q4. When an asset is sold for more than its book value, the difference is credited to which account?

  1. Profit and Loss Account ✓ (correct)
  2. General Reserve
  3. Asset Disposal Account
  4. Depreciation Account

Explanation: The profit on sale of an asset (selling price minus book value) is credited to the Profit and Loss Account as it represents a gain.

Q5. What does the 'book value' of an asset represent?

  1. The market value of the asset
  2. The original cost less accumulated depreciation ✓ (correct)
  3. The estimated selling price of the asset
  4. The original cost of the asset

Explanation: The book value or carrying amount of an asset is its original cost minus the total depreciation charged against it up to the reporting date.

Q6. The Depreciation Fund is a type of:

  1. Secret Reserve
  2. Capital Reserve
  3. Specific Reserve ✓ (correct)
  4. General Reserve

Explanation: A Depreciation Fund is a specific reserve created to accumulate funds for the eventual replacement of an asset. It is a specific reserve.

Q7. A provision for doubtful debts is created to:

  1. Accumulate funds for future expansion
  2. Reduce the profits to avoid higher taxes
  3. Meet an ascertained liability
  4. Meet a probable liability arising from bad debts ✓ (correct)

Explanation: A provision for doubtful debts is created to account for potential losses from customers who may not pay their debts. This is a probable liability and hence a provision.

Q8. Which of the following is a capital reserve?

  1. Profit on sale of Fixed Assets ✓ (correct)
  2. Workmen Compensation Reserve
  3. Debenture Redemption Reserve
  4. General Reserve

Explanation: Capital reserves arise from capital profits, such as profits on the sale of fixed assets or investments, or profits from revaluation of assets. The other options are revenue reserves.

Q9. Under which method of depreciation is the amount of depreciation charged uniform every year?

  1. Units of Production Method
  2. Straight Line Method ✓ (correct)
  3. Sum-of-the-Years'-Digits Method
  4. Reducing Balance Method

Explanation: The Straight Line Method (SLM) charges a fixed percentage of the original cost of the asset as depreciation every year, resulting in a uniform amount of depreciation.

Q10. If a company decides to change its method of depreciation from Straight Line Method to Reducing Balance Method, this change is accounted for:

  1. As a change in accounting policy with retrospective effect
  2. By creating a special reserve
  3. As a change in accounting estimate with prospective effect ✓ (correct)
  4. As a prior period item

Explanation: A change in the method of depreciation is considered a change in accounting policy. However, AS 6 (Depreciation Accounting) states that changes in depreciation methods are accounted for prospectively as a change in accounting estimate, meaning the effect is recognized in the current and future periods.

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