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
At 31 December, electricity used in December (€800) has not yet been billed. Which year-end entry is correct?
- ADebit prepayments, credit cash
- BNo entry until the bill arrives
- CDebit accruals, credit electricity expense
- DDebit electricity expense, credit accruals
2.Financial accountingHard
Under IFRS 16, a lessee typically recognises a lease on the balance sheet as:
- AEquity and a provision
- BA right-of-use asset and a lease liability
- CRevenue and inventory
- DAn operating expense only, spread evenly over the lease term
3.DepreciationMedium
A delivery van costs €80 000, has a useful life of 10 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 5.
cost = €80 000life = 10salvage = €16 000year = 5
D = €
4.DepreciationHard
A delivery van costs €50 000, has a useful life of 8 years and a salvage value of €2 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €50 000life = 8salvage = €2 500year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · Debit electricity expense, credit accruals
Why this is the answer
The accrual records December's cost as an expense this year with a current liability, so expenses match the period of use.
Answer
D · Debit electricity expense, credit accruals
2.Financial accounting
Answer: B · A right-of-use asset and a lease liability
Why this is the answer
IFRS 16 removed the operating lease distinction for lessees: they recognise a right-of-use asset and a liability for lease payments, except for short-term and low-value leases.
Answer
B · A right-of-use asset and a lease liability
3.Depreciation
Answer: D = 6554 €
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
year 5: 0.2·32 768.00 = €6 553.60
Answer
D = €6 553.60
4.Depreciation
Answer: D = 6597 €
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 = 47 500·5/36 = €6 597.22
Answer
D = €6 597.22
ExamProblems · examproblems.com/courses/financial-accounting