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 item cost €80. It can be sold for €90, but €20 must be spent to sell it. At what amount is it shown in inventory?
- A€70
- B€80
- C€90
- D€60
2.Financial accountingHard
Under IFRS 15, revenue is recognised:
- AWhen the contract is signed
- BAt the end of the financial year
- CWhen (or as) the entity satisfies a performance obligation by transferring control to the customer
- DOnly when cash is received
3.DepreciationMedium
A computer system costs €100 000, has a useful life of 4 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 2.
cost = €100 000life = 4salvage = €10 000year = 2
D = €
4.DepreciationHard
A machine costs €50 000, has a useful life of 5 years and a salvage value of €2 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €50 000life = 5salvage = €2 500year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · €70
Why this is the answer
NRV = €90 − €20 = €70, which is below cost of €80. Inventory is measured at the lower amount, €70, with a €10 write-down.
Answer
A · €70
2.Financial accounting
Answer: C · When (or as) the entity satisfies a performance obligation by transferring control to the customer
Why this is the answer
The steps: identify the contract, identify performance obligations, determine the price, allocate it, and recognise revenue as each obligation is satisfied.
Answer
C · When (or as) the entity satisfies a performance obligation by transferring control to the customer
3.Depreciation
Answer: D = 25000 €
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
2/4 = 0.5
Year by year
year 1: 0.5·100 000.00 = €50 000.00
year 2: 0.5·50 000.00 = €25 000.00
Answer
D = €25 000.00
4.Depreciation
Answer: D = 12667 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 47 500·4/15 = €12 666.67
Answer
D = €12 666.67
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