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?
- ARetrospectively, by restating all prior years
- BProspectively, by spreading the remaining carrying amount over the new remaining life
- CBy recognising a large gain in the current year
- DBy changing the original cost of the machine
2.Financial accountingHard
A parent sold goods to its subsidiary at a profit, and the subsidiary still holds them at year end. What must happen on consolidation?
- AThe sale is shown as external revenue of the group
- BThe unrealised profit in inventory is eliminated
- CThe profit is shown twice, once for each company
- DNothing, because each company is a separate entity
3.DepreciationMedium
A computer system costs €100 000, has a useful life of 8 years and a salvage value of €10 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €100 000life = 8salvage = €10 000year = 3
D = €
4.DepreciationHard
A machine costs €45 000, has a useful life of 6 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €45 000life = 6salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · 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
B · Prospectively, by spreading the remaining carrying amount over the new remaining life
2.Financial accounting
Answer: B · The unrealised profit in inventory is eliminated
Why this is the answer
Intra-group sales and purchases are cancelled, and profit on goods still held in the group is removed from inventory and group profit until sold outside.
Answer
B · The unrealised profit in inventory is eliminated
3.Depreciation
Answer: D = 14063 €
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
2/8 = 0.25
Year by year
year 1: 0.25·100 000.00 = €25 000.00
year 2: 0.25·75 000.00 = €18 750.00
year 3: 0.25·56 250.00 = €14 062.50
Answer
D = €14 062.50
4.Depreciation
Answer: D = 10714 €
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 2
(6 − 2 + 1)/21 = 5/21
Depreciation
D = 45 000·5/21 = €10 714.29
Answer
D = €10 714.29
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