Depreciation
- Straight-line
- (cost − salvage)/life
- Double-declining balance
- 2/life × book value at the start of the year
- Sum of the years’ digits
- (cost − salvage) × remaining life/SYD
- SYD
- n(n + 1)/2
- Book value
- cost − accumulated depreciation
Financial Accounting: cram pack
Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.
1Formulas and methods
2Practice problems
1.Financial accountingMedium
Under the accrual basis of accounting, revenue is recognised when:
- AThe tax return is filed
- BCash is received
- CThe customer pays the invoice, even if goods were delivered earlier
- DIt is earned, whether or not cash has been received
2.Financial accountingHard
After the year end, but before the accounts are approved, a customer who owed money at year end goes bankrupt. Under IAS 10 this is:
- AIgnored, because it happened after the year end
- BAn adjusting event, so receivables are reduced
- CA change in accounting policy
- DA non-adjusting event, disclosed only
3.DepreciationMedium
A machine costs €30 000, has a useful life of 4 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €0year = 2
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 10 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €120 000life = 10salvage = €6 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · It is earned, whether or not cash has been received
Why this is the answer
Accrual accounting records revenue when the performance obligation is satisfied and expenses when incurred, not when cash moves.
Answer
D · It is earned, whether or not cash has been received
2.Financial accounting
Answer: B · An adjusting event, so receivables are reduced
Why this is the answer
The customer's inability to pay existed at year end, so the accounts are adjusted. A fire after year end would be non-adjusting, because it is a new condition.
Answer
B · An adjusting event, so receivables are reduced
3.Depreciation
Answer: D = 7500 €
Depreciation spreads the cost of an asset over its useful life. Straight-line: (cost − salvage value)/life every year. Double-declining balance: 2/life times the book value at the start of each year, so the charge falls each year (salvage is not subtracted, but the book value never goes below it). Sum-of-the-years’-digits: (cost − salvage) × remaining life/(1 + 2 + … + n).
Rate
2/4 = 0.5
Year by year
year 1: 0.5·30 000.00 = €15 000.00
year 2: 0.5·15 000.00 = €7 500.00
Answer
D = €7 500.00
4.Depreciation
Answer: D = 14509 €
Depreciation spreads the cost of an asset over its useful life. Straight-line: (cost − salvage value)/life every year. Double-declining balance: 2/life times the book value at the start of each year, so the charge falls each year (salvage is not subtracted, but the book value never goes below it). Sum-of-the-years’-digits: (cost − salvage) × remaining life/(1 + 2 + … + n).
Fraction for year 4
(10 − 4 + 1)/55 = 7/55
Depreciation
D = 114 000·7/55 = €14 509.09
Answer
D = €14 509.09
ExamProblems · examproblems.com/courses/financial-accounting