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
- CMarginal costing is required by IFRS for external reporting
- DAbsorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
2.Financial accountingHard
An asset has a carrying amount of €500,000, fair value less costs of disposal of €380,000 and value in use of €420,000. What impairment loss is recognised?
- A€200,000
- B€0
- C€120,000
- D€80,000
3.DepreciationMedium
A machine costs €12 000, has a useful life of 4 years and a salvage value of €500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €12 000life = 4salvage = €500year = 2
D = €
4.DepreciationHard
A machine 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 4.
cost = €24 000life = 8salvage = €0year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · 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
D · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
2.Financial accounting
Answer: D · €80,000
Why this is the answer
Recoverable amount = max(€380,000, €420,000) = €420,000. Impairment = €500,000 − €420,000 = €80,000.
Answer
D · €80,000
3.Depreciation
Answer: D = 3000 €
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
2/4 = 0.5
Year by year
year 1: 0.5·12 000.00 = €6 000.00
year 2: 0.5·6 000.00 = €3 000.00
Answer
D = €3 000.00
4.Depreciation
Answer: D = 3333 €
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 = 24 000·5/36 = €3 333.33
Answer
D = €3 333.33
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