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
What is the key difference between absorption costing and marginal costing?
- AAbsorption costing ignores variable costs
- BMarginal costing includes all overheads in inventory; absorption costing excludes them
- CAbsorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
- DMarginal costing is required by IFRS for external reporting
2.Financial accountingHard
Tax rules allow faster depreciation of a machine than the company uses in its accounts. What arises under IAS 12?
- AA deferred tax asset
- BA refund of current tax paid
- CNo tax effect at all
- DA deferred tax liability
3.DepreciationMedium
A machine costs €50 000, 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 = €50 000life = 6salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €12 000, has a useful life of 6 years and a salvage value of €2 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €12 000life = 6salvage = €2 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: C · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
Why this is the answer
Under absorption costing each unit carries a share of fixed production overhead. Marginal costing values inventory at variable cost only and expenses fixed costs in the period.
Answer
C · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
2.Financial accounting
Answer: D · A deferred tax liability
Why this is the answer
The tax base falls faster than the carrying amount, creating a taxable temporary difference. The future extra tax is recognised now as a deferred tax liability.
Answer
D · A deferred tax liability
3.Depreciation
Answer: D = 11111 €
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: 0.3333·50 000.00 = €16 666.67
year 2: 0.3333·33 333.33 = €11 111.11
Answer
D = €11 111.11
4.Depreciation
Answer: D = 1429 €
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 4
(6 − 4 + 1)/21 = 3/21
Depreciation
D = 10 000·3/21 = €1 428.57
Answer
D = €1 428.57
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