Explanation
As per the provisions of written down value method:-
Value of depreciation for the Year 2008-2009 is 5,00,000@10% = Rs 50,000
Value of depreciation for the Year 2009-20010 is 4,50,000 (5,00,000-50,000)@10% = Rs 45,000
Value of depreciation for the Year 2010-2011 is 4,05,000 (4,50,000-45,000)@10% = Rs 40,500
Which implies that written down value of the machinery for the year ending 31st march 2011 will be Rs 3,64,500 (4,05,000-40,500).
Fixed Installment Method or Equal Installment Method or Straight Line Method or Fixed Percentage on Original Cost Method: In this method a fixed or equal amount of depreciation written off as depreciation at the end of each year, during the life time of the asset.
Written Down Value Method or Diminishing Balance Method or Reducing Balance Method: It can be calculated by a method of depreciation that is sometimes called the diminishing balance method. This accounting technique reduces the value of an asset by a set percentage each year. When selling the asset, the book value is used to help determine the minimum value for which it will be sold.
Book value is a measure of all of a company's assets: stocks, bonds, inventory, manufacturing equipment, real estate, etc. In theory, book value should include everything down to the pencils and staples used by employees, but for simplicity's sake companies generally only include large assets that are easily quantified.
Depreciation reserve is a business fund in which the probable replacement cost of equipment is accumulated each year over the life of the asset. It can be replaced readily when it becomes obsolete and totally depreciated. It is the total depreciation charged against all productive assets as stated on the balance sheet.
Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statement. This is based on the concept of conservatism.
Depletion.
Depletion is an accounting and tax concept used most often in mining, timber, petroleum, or other similar industries. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Depletion is similar to depreciation in that it is a cost recovery system for accounting and tax reporting.
Depletion for both accounting purposes and united states tax purposes, is a method of recording the gradual expense or use of natural resources over time. Depletion is using up of natural resources by mining, drilling, or felling.
SECRET RESERVES:-"A reserve which is not visible on the balance sheet is called secret reserves."It is a surplus concealed. In case of a secret reserve existence, the actual financial position of the business is better than shown in the balance sheet. In the case of banks, insurance companies, and financial institutions secret reserves are justified.CREATION OF SECRET RESERVES:-Secret reserves may be created in the following ways :1. High Value Of Goodwill:-In the balance sheet if the value of goodwill is shown nominal or low but in fact, its value is high reserve may be created.2. Shown More Bad Debts:-If management has made excessive provisions for bad debts. In fact these are less than the reserves allocated. So keeping in view the difference secret reserves can be created.3. Shown More Depreciation:-By providing too much depreciation on fixed assets, management creates secret reserves.4. More Liabilities Shown:-By overvaluing the liabilities, management may create secret reserves. Due to this, profits reduce.5. Low Value Of Fixed Assets:-In the balance sheet, the value of fixed assets is shown very low real value is very high. In this situation, secret reserves may be created.6. Under Value Of Current Assets:-Management shows less value of the current assets in the balance sheet but the actual value of the current asset is greater. So the secret reserves may be created.7. Contingent Liabilities As Red Liabilities:-To create secret reserves management shows the contingent liabilities as real liabilities in the balance sheet. So profits and reserves may be reduced equal to the secret reserves.8. Fictitious Liabilities Shown:-To create the secret reserves management shows the fictitious as actual liabilities.9. Capital Expenditure To Revenue:-Sometimes to create the secret reserves management charges the capital expenditure to revenue. The profit is reduced.10. By Omitting:-Sometimes management omits some assets from the balance sheet and in this way it creates the secret reserves.
Option C is the correct one.
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