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
A company finds that a machine will last 8 years instead of the 5 originally estimated. Under IAS 8, how is this change applied?
- AProspectively, by spreading the remaining carrying amount over the new remaining life
- BBy changing the original cost of the machine
- CRetrospectively, by restating all prior years
- DBy recognising a large gain in the current year
2.Financial accountingHard
Under the IAS 16 revaluation model, a building is revalued upwards for the first time. Where does the gain go?
- ATo retained earnings as a realised profit
- BTo a provision on the balance sheet
- CTo revenue in the income statement
- DTo other comprehensive income and a revaluation surplus in equity
3.DepreciationMedium
A production line costs €12 000, has a useful life of 10 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 8.
cost = €12 000life = 10salvage = €0year = 8
D = €
4.DepreciationHard
A production line costs €60 000, 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 = €60 000life = 10salvage = €6 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · Prospectively, by spreading the remaining carrying amount over the new remaining life
Why this is the answer
Changes in estimates affect the current and future periods only. Prior-period restatement is for changes in policy and corrections of errors.
Answer
A · Prospectively, by spreading the remaining carrying amount over the new remaining life
2.Financial accounting
Answer: D · To other comprehensive income and a revaluation surplus in equity
Why this is the answer
Upward revaluations are credited to a revaluation surplus via OCI, unless they reverse an earlier decrease recognised in profit or loss.
Answer
D · To other comprehensive income and a revaluation surplus in equity
3.Depreciation
Answer: D = 503.3 €
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
2/10 = 0.2
Year by year
year 1: 0.2·12 000.00 = €2 400.00
year 2: 0.2·9 600.00 = €1 920.00
year 3: 0.2·7 680.00 = €1 536.00
year 4: 0.2·6 144.00 = €1 228.80
year 5: 0.2·4 915.20 = €983.04
year 6: 0.2·3 932.16 = €786.43
year 7: 0.2·3 145.73 = €629.15
year 8: 0.2·2 516.58 = €503.32
Answer
D = €503.32
4.Depreciation
Answer: D = 6873 €
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 = 54 000·7/55 = €6 872.73
Answer
D = €6 872.73
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