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
At 31 December, electricity used in December (€800) has not yet been billed. Which year-end entry is correct?
- ADebit electricity expense, credit accruals
- BDebit accruals, credit electricity expense
- CNo entry until the bill arrives
- DDebit prepayments, credit cash
2.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- AProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- BDepreciation must have been too high
- CThe company must have repaid all its loans
- DThe company has very high earnings quality
3.DepreciationMedium
A computer system costs €120 000, has a useful life of 6 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 2.
cost = €120 000life = 6salvage = €12 000year = 2
D = €
4.DepreciationHard
A machine costs €20 000, has a useful life of 6 years and a salvage value of €4 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €20 000life = 6salvage = €4 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · Debit electricity expense, credit accruals
Why this is the answer
The accrual records December's cost as an expense this year with a current liability, so expenses match the period of use.
Answer
A · Debit electricity expense, credit accruals
2.Financial accounting
Answer: A · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
Why this is the answer
A widening gap between profit and operating cash flow often signals working capital build-up or aggressive recognition, suggesting low earnings quality.
Answer
A · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 26667 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·120 000.00 = €40 000.00
year 2: 0.3333·80 000.00 = €26 666.67
Answer
D = €26 666.67
4.Depreciation
Answer: D = 3048 €
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
(6 − 3 + 1)/21 = 4/21
Depreciation
D = 16 000·4/21 = €3 047.62
Answer
D = €3 047.62
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