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
Current assets are €300,000 and current liabilities are €150,000. What is the current ratio?
- A1.5
- B0.5
- C4.5
- D2.0
2.Financial accountingHard
A firm with spare capacity gets a one-off order at €35 per unit. Variable cost is €30 and full cost including fixed overhead is €42. Assuming no other effects, should it accept?
- AYes, but only if the price exceeds €42
- BNo, the price is below full cost
- CNo, the order makes a €7 loss per unit
- DYes, each unit adds €5 contribution
3.DepreciationMedium
A production line costs €80 000, has a useful life of 10 years and a salvage value of €12 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €80 000life = 10salvage = €12 000year = 4
D = €
4.DepreciationHard
A computer system costs €20 000, 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 2.
cost = €20 000life = 5salvage = €4 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · 2.0
Why this is the answer
€300,000 ÷ €150,000 = 2.0, so current assets cover short-term obligations twice.
Answer
D · 2.0
2.Financial accounting
Answer: D · Yes, each unit adds €5 contribution
Why this is the answer
Fixed costs do not change, so the order adds €35 − €30 = €5 per unit to profit. Risks such as upsetting regular customers should still be considered.
Answer
D · Yes, each unit adds €5 contribution
3.Depreciation
Answer: D = 8192 €
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
2/10 = 0.2
Year by year
year 1: 0.2·80 000.00 = €16 000.00
year 2: 0.2·64 000.00 = €12 800.00
year 3: 0.2·51 200.00 = €10 240.00
year 4: 0.2·40 960.00 = €8 192.00
Answer
D = €8 192.00
4.Depreciation
Answer: D = 4267 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 16 000·4/15 = €4 266.67
Answer
D = €4 266.67
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