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
Operating profit is €120,000 and interest expense is €30,000. What is interest cover?
- A4 times
- B3 times
- C90,000 times
- D0.25 times
2.Financial accountingHard
Production exceeds sales this period, so inventory rises. How does absorption costing profit compare with marginal costing profit?
- AAbsorption costing profit is higher
- BThey are always equal
- CAbsorption costing shows a loss
- DMarginal costing profit is higher this period
3.DepreciationMedium
A computer system costs €50 000, has a useful life of 5 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 3.
cost = €50 000life = 5salvage = €10 000year = 3
D = €
4.DepreciationHard
A production line costs €120 000, has a useful life of 10 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €120 000life = 10salvage = €0year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · 4 times
Why this is the answer
€120,000 ÷ €30,000 = 4. The company earns its interest four times over; low cover signals a risk of not meeting interest payments.
Answer
A · 4 times
2.Financial accounting
Answer: A · Absorption costing profit is higher
Why this is the answer
Under absorption costing part of this period's fixed overhead sits in closing inventory instead of being expensed, so reported profit is higher when inventory rises.
Answer
A · Absorption costing profit is higher
3.Depreciation
Answer: D = 7200 €
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: 0.4·50 000.00 = €20 000.00
year 2: 0.4·30 000.00 = €12 000.00
year 3: 0.4·18 000.00 = €7 200.00
Answer
D = €7 200.00
4.Depreciation
Answer: D = 15273 €
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
(10 − 4 + 1)/55 = 7/55
Depreciation
D = 120 000·7/55 = €15 272.73
Answer
D = €15 272.73
ExamProblems · examproblems.com/courses/financial-accounting