Depreciation, Provisions and Reserves (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?

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

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?

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

Retained Earnings
Profit on Sale of Investments ✓ (correct)
General Reserve
Dividend Equity Reserve

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?

Depreciation Account
Asset Disposal Account
Profit and Loss Account ✓ (correct)
General Reserve

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?

The market value of the asset
The estimated selling price of the asset
The original cost of the asset
The original cost less accumulated depreciation ✓ (correct)

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:

Specific Reserve ✓ (correct)
Secret Reserve
General Reserve
Capital 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:

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

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?

General Reserve
Debenture Redemption Reserve
Profit on sale of Fixed Assets ✓ (correct)
Workmen Compensation 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?

Units of Production Method
Sum-of-the-Years'-Digits Method
Reducing Balance Method
Straight Line Method ✓ (correct)

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:

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

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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