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
The prudence (conservatism) concept suggests that accountants should:
- AAvoid overstating assets and income under uncertainty
- BAlways record the highest possible profit to attract investors
- CIgnore possible losses
- DValue assets at their selling price
2.Financial accountingHard
A firm has a net profit margin of 5%, asset turnover of 2 and an equity multiplier (assets ÷ equity) of 1.5. Using the DuPont analysis, what is ROE?
- A8.5%
- B7.5%
- C10%
- D15%
3.DepreciationMedium
A computer system costs €80 000, has a useful life of 6 years and a salvage value of €16 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €80 000life = 6salvage = €16 000year = 3
D = €
4.DepreciationHard
A delivery van costs €60 000, has a useful life of 8 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €60 000life = 8salvage = €12 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · Avoid overstating assets and income under uncertainty
Why this is the answer
Prudence means exercising caution so that assets and income are not overstated and liabilities and expenses not understated.
Answer
A · Avoid overstating assets and income under uncertainty
2.Financial accounting
Answer: D · 15%
Why this is the answer
ROE = 5% × 2 × 1.5 = 15%. DuPont shows whether returns come from profitability, asset efficiency or leverage.
Answer
D · 15%
3.Depreciation
Answer: D = 11852 €
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: 0.3333·80 000.00 = €26 666.67
year 2: 0.3333·53 333.33 = €17 777.78
year 3: 0.3333·35 555.56 = €11 851.85
Answer
D = €11 851.85
4.Depreciation
Answer: D = 6667 €
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
(8 − 4 + 1)/36 = 5/36
Depreciation
D = 48 000·5/36 = €6 666.67
Answer
D = €6 666.67
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