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 costs €100,000 and brings in €25,000 cash per year. What is its payback period?
- A4 years
- B5 years
- C2.5 years
- D25 years
2.Financial accountingHard
When does activity-based costing (ABC) give the biggest improvement over traditional absorption costing?
- AWhen overheads are very small compared with direct costs
- BWhen all costs are variable with labour hours
- CWhen overheads are large and driven by activities like set-ups rather than volume
- DWhen a firm makes only one standard product
3.DepreciationMedium
A computer system costs €30 000, has a useful life of 4 years and a salvage value of €1 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €1 500year = 2
D = €
4.DepreciationHard
A machine costs €45 000, has a useful life of 6 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 = €45 000life = 6salvage = €4 500year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · 4 years
Why this is the answer
€100,000 ÷ €25,000 = 4 years. Payback is simple but ignores the time value of money and cash flows after payback.
Answer
A · 4 years
2.Financial accounting
Answer: C · When overheads are large and driven by activities like set-ups rather than volume
Why this is the answer
ABC assigns overheads using cost drivers for each activity. Where products use activities very differently, a single volume-based rate distorts product costs.
Answer
C · When overheads are large and driven by activities like set-ups rather than volume
3.Depreciation
Answer: D = 7500 €
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: 0.5·30 000.00 = €15 000.00
year 2: 0.5·15 000.00 = €7 500.00
Answer
D = €7 500.00
4.Depreciation
Answer: D = 9643 €
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 = 40 500·5/21 = €9 642.86
Answer
D = €9 642.86
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