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
Which depreciation method charges the same amount every year?
- AStraight-line
- BUnits of production
- CReducing balance
- DSum-of-the-years'-digits
2.Financial accountingHard
A company issues shares at €5 each with a nominal value of €1. The extra €4 per share is recorded as:
- ARevenue
- BShare premium
- CA liability
- DRetained earnings
3.DepreciationMedium
A computer system costs €45 000, has a useful life of 10 years and a salvage value of €4 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 8.
cost = €45 000life = 10salvage = €4 500year = 8
D = €
4.DepreciationHard
A production line costs €100 000, has a useful life of 6 years and a salvage value of €15 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €100 000life = 6salvage = €15 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · Straight-line
Why this is the answer
Straight-line spreads the depreciable amount evenly. Reducing balance charges more in early years; units of production follows actual use.
Answer
A · Straight-line
2.Financial accounting
Answer: B · Share premium
Why this is the answer
The amount above nominal value goes to the share premium account in equity; issuing shares is a financing transaction, not income.
Answer
B · Share premium
3.Depreciation
Answer: D = 1887 €
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: 0.2·45 000.00 = €9 000.00
year 2: 0.2·36 000.00 = €7 200.00
year 3: 0.2·28 800.00 = €5 760.00
year 4: 0.2·23 040.00 = €4 608.00
year 5: 0.2·18 432.00 = €3 686.40
year 6: 0.2·14 745.60 = €2 949.12
year 7: 0.2·11 796.48 = €2 359.30
year 8: 0.2·9 437.18 = €1 887.44
Answer
D = €1 887.44
4.Depreciation
Answer: D = 12143 €
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
(6 − 4 + 1)/21 = 3/21
Depreciation
D = 85 000·3/21 = €12 142.86
Answer
D = €12 142.86
ExamProblems · examproblems.com/courses/financial-accounting