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 has a positive net present value (NPV) at the company's cost of capital. This means:
- AIt earns more than the required return and should add value
- BIts reported accounting profit will be positive in every year
- CIt has no risk at all
- DIt recovers its cost within one year
2.Financial accountingHard
The standard is 2 labour hours per unit at €20 an hour. 500 units are made in 1,100 hours. What is the labour efficiency variance?
- A€22,000 adverse
- B€2,000 favourable
- C€2,000 adverse
- D€1,000 adverse
3.DepreciationMedium
A production line costs €20 000, has a useful life of 6 years and a salvage value of €3 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €20 000life = 6salvage = €3 000year = 2
D = €
4.DepreciationHard
A production line costs €60 000, has a useful life of 6 years and a salvage value of €9 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €60 000life = 6salvage = €9 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · It earns more than the required return and should add value
Why this is the answer
A positive NPV means the present value of inflows exceeds the investment at the required rate, so the project increases shareholder wealth.
Answer
A · It earns more than the required return and should add value
2.Financial accounting
Answer: C · €2,000 adverse
Why this is the answer
Standard hours = 500 × 2 = 1,000. Extra 100 hours × €20 = €2,000 adverse, because more hours were used than the standard allows.
Answer
C · €2,000 adverse
3.Depreciation
Answer: D = 4444 €
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: 0.3333·20 000.00 = €6 666.67
year 2: 0.3333·13 333.33 = €4 444.44
Answer
D = €4 444.44
4.Depreciation
Answer: D = 9714 €
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
(6 − 3 + 1)/21 = 4/21
Depreciation
D = 51 000·4/21 = €9 714.29
Answer
D = €9 714.29
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