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 project has a positive net present value (NPV) at the company's cost of capital. This means:
- AIts reported accounting profit will be positive in every year
- BIt has no risk at all
- CIt recovers its cost within one year
- DIt earns more than the required return and should add value
2.Financial accountingHard
An asset has a carrying amount of €500,000, fair value less costs of disposal of €380,000 and value in use of €420,000. What impairment loss is recognised?
- A€0
- B€120,000
- C€80,000
- D€200,000
3.DepreciationMedium
A production line costs €45 000, has a useful life of 5 years and a salvage value of €9 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €45 000life = 5salvage = €9 000year = 2
D = €
4.DepreciationHard
A production line costs €30 000, has a useful life of 4 years and a salvage value of €4 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €4 500year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · It earns more than the required return and should add value
Why this is the answer
A positive NPV means the present value of inflows exceeds the investment at the required rate, so the project increases shareholder wealth.
Answer
D · It earns more than the required return and should add value
2.Financial accounting
Answer: C · €80,000
Why this is the answer
Recoverable amount = max(€380,000, €420,000) = €420,000. Impairment = €500,000 − €420,000 = €80,000.
Answer
C · €80,000
3.Depreciation
Answer: D = 10800 €
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
2/5 = 0.4
Year by year
year 1: 0.4·45 000.00 = €18 000.00
year 2: 0.4·27 000.00 = €10 800.00
Answer
D = €10 800.00
4.Depreciation
Answer: D = 7650 €
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
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 25 500·3/10 = €7 650.00
Answer
D = €7 650.00
ExamProblems · examproblems.com/courses/financial-accounting