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
Profit for ordinary shareholders is €500,000 and there are 1,000,000 ordinary shares. What are basic earnings per share?
- A€2.00
- B€0.50
- C€5.00
- D€0.05
2.Financial accountingHard
The going concern assumption means financial statements are prepared assuming the entity:
- AWill continue to operate for the foreseeable future
- BHas no debts
- CWill make a profit every year
- DWill be sold within one year
3.DepreciationMedium
A production line costs €20 000, has a useful life of 5 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €20 000life = 5salvage = €0year = 2
D = €
4.DepreciationHard
A machine costs €80 000, has a useful life of 5 years and a salvage value of €4 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €80 000life = 5salvage = €4 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: B · €0.50
Why this is the answer
Basic EPS = €500,000 ÷ 1,000,000 = €0.50 per share. Dividing the share price by EPS gives the P/E ratio.
Answer
B · €0.50
2.Financial accounting
Answer: A · Will continue to operate for the foreseeable future
Why this is the answer
Unless management intends or must liquidate, assets and liabilities are measured assuming continued operations; material doubts must be disclosed.
Answer
A · Will continue to operate for the foreseeable future
3.Depreciation
Answer: D = 4800 €
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: 0.4·20 000.00 = €8 000.00
year 2: 0.4·12 000.00 = €4 800.00
Answer
D = €4 800.00
4.Depreciation
Answer: D = 15200 €
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 3
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 76 000·3/15 = €15 200.00
Answer
D = €15 200.00
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