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
Operating profit is €120,000 and interest expense is €30,000. What is interest cover?
- A90,000 times
- B0.25 times
- C4 times
- D3 times
2.Financial accountingHard
A firm has spent €50,000 on market research for a new product and must decide whether to launch it. How should the €50,000 be treated in the decision?
- AAdded to the launch cost
- BIgnored, because it is a sunk cost
- CSpread over the product's expected life
- DDeducted from expected sales
3.DepreciationMedium
A production line costs €60 000, has a useful life of 5 years and a salvage value of €12 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €60 000life = 5salvage = €12 000year = 3
D = €
4.DepreciationHard
A production line costs €20 000, has a useful life of 10 years and a salvage value of €2 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €20 000life = 10salvage = €2 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: C · 4 times
Why this is the answer
€120,000 ÷ €30,000 = 4. The company earns its interest four times over; low cover signals a risk of not meeting interest payments.
Answer
C · 4 times
2.Financial accounting
Answer: B · Ignored, because it is a sunk cost
Why this is the answer
The research money is spent whichever choice is made, so it is irrelevant. Only future incremental cash flows from launching should be compared.
Answer
B · Ignored, because it is a sunk cost
3.Depreciation
Answer: D = 8640 €
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
2/5 = 0.4
Year by year
year 1: 0.4·60 000.00 = €24 000.00
year 2: 0.4·36 000.00 = €14 400.00
year 3: 0.4·21 600.00 = €8 640.00
Answer
D = €8 640.00
4.Depreciation
Answer: D = 2618 €
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 3
(10 − 3 + 1)/55 = 8/55
Depreciation
D = 18 000·8/55 = €2 618.18
Answer
D = €2 618.18
ExamProblems · examproblems.com/courses/financial-accounting