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 provision is recognised when a company has:
- AA profit to distribute
- BA possible future loss with no obligation
- CA present obligation from a past event, a probable outflow and a reliable estimate
- DCash set aside in a separate account
2.Financial accountingHard
When does activity-based costing (ABC) give the biggest improvement over traditional absorption costing?
- AWhen all costs are variable with labour hours
- BWhen overheads are large and driven by activities like set-ups rather than volume
- CWhen a firm makes only one standard product
- DWhen overheads are very small compared with direct costs
3.DepreciationMedium
A machine costs €100 000, has a useful life of 6 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 = €100 000life = 6salvage = €0year = 2
D = €
4.DepreciationHard
A production line costs €30 000, has a useful life of 8 years and a salvage value of €4 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €30 000life = 8salvage = €4 500year = 3
D = €
3Solutions
1.Financial accounting
Answer: C · A present obligation from a past event, a probable outflow and a reliable estimate
Why this is the answer
Provisions are liabilities of uncertain timing or amount. Possible obligations that do not meet the criteria are disclosed as contingent liabilities.
Answer
C · A present obligation from a past event, a probable outflow and a reliable estimate
2.Financial accounting
Answer: B · 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
B · When overheads are large and driven by activities like set-ups rather than volume
3.Depreciation
Answer: D = 22222 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·100 000.00 = €33 333.33
year 2: 0.3333·66 666.67 = €22 222.22
Answer
D = €22 222.22
4.Depreciation
Answer: D = 4250 €
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
(8 − 3 + 1)/36 = 6/36
Depreciation
D = 25 500·6/36 = €4 250.00
Answer
D = €4 250.00
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