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
Which error will NOT be revealed by a trial balance?
- AA sale left out of the books entirely
- BA debit posted without a matching credit
- CA balance copied to the wrong column
- DA wrongly added ledger column
2.Financial accountingHard
Closing inventory this year is overstated by €10,000 by mistake. What is the effect on profit, if not corrected?
- AThis year's profit is overstated and next year's understated by €10,000
- BProfit is unaffected; only the balance sheet changes
- CBoth years' profits are overstated
- DOnly this year's profit is understated
3.DepreciationMedium
A machine costs €120 000, has a useful life of 5 years and a salvage value of €24 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €120 000life = 5salvage = €24 000year = 3
D = €
4.DepreciationHard
A computer system costs €24 000, has a useful life of 8 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €24 000life = 8salvage = €0year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · A sale left out of the books entirely
Why this is the answer
An error of omission leaves both sides unrecorded, so totals still agree. Single-sided postings and addition errors make the trial balance differ.
Answer
A · A sale left out of the books entirely
2.Financial accounting
Answer: A · This year's profit is overstated and next year's understated by €10,000
Why this is the answer
Higher closing inventory reduces cost of sales, raising this year's profit. Next year opening inventory is too high, increasing cost of sales and lowering profit by the same amount.
Answer
A · This year's profit is overstated and next year's understated by €10,000
3.Depreciation
Answer: D = 17280 €
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: 0.4·120 000.00 = €48 000.00
year 2: 0.4·72 000.00 = €28 800.00
year 3: 0.4·43 200.00 = €17 280.00
Answer
D = €17 280.00
4.Depreciation
Answer: D = 4000 €
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 = 24 000·6/36 = €4 000.00
Answer
D = €4 000.00
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