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
An asset costs €50,000, has a residual value of €5,000 and a useful life of 5 years. What is the annual straight-line depreciation?
- A€10,000
- B€9,000
- C€11,000
- D€5,000
2.Financial accountingHard
Operating profit is €200,000 and capital employed (equity plus non-current liabilities) is €1,000,000. What is ROCE?
- A5%
- B50%
- C2%
- D20%
3.DepreciationMedium
A delivery van costs €120 000, has a useful life of 6 years and a salvage value of €6 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €120 000life = 6salvage = €6 000year = 3
D = €
4.DepreciationHard
A computer system costs €80 000, has a useful life of 5 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €80 000life = 5salvage = €12 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: B · €9,000
Why this is the answer
(Cost − residual value) ÷ useful life = (€50,000 − €5,000) ÷ 5 = €9,000 per year.
Answer
B · €9,000
2.Financial accounting
Answer: D · 20%
Why this is the answer
ROCE = €200,000 ÷ €1,000,000 = 20%. It measures returns on all long-term finance, so it can be compared with the cost of borrowing.
Answer
D · 20%
3.Depreciation
Answer: D = 17778 €
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
year 3: 0.3333·53 333.33 = €17 777.78
Answer
D = €17 777.78
4.Depreciation
Answer: D = 13600 €
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
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 68 000·3/15 = €13 600.00
Answer
D = €13 600.00
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