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
Budgeted sales are 1,500 units and the break-even point is 1,000 units. What is the margin of safety?
- A2,500 units
- B500 units
- C1,000 units
- D1,500 units
2.Financial accountingHard
Goodwill arises in a business combination when:
- AThe consideration paid exceeds the fair value of identifiable net assets acquired
- BThe acquired company makes a loss
- CAssets are revalued upwards
- DA company has a good reputation
3.DepreciationMedium
A computer system costs €45 000, has a useful life of 8 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 6.
cost = €45 000life = 8salvage = €2 500year = 6
D = €
4.DepreciationHard
A production line costs €24 000, has a useful life of 5 years and a salvage value of €1 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €24 000life = 5salvage = €1 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: B · 500 units
Why this is the answer
Margin of safety = budgeted sales − break-even sales = 500 units, or one third of budgeted sales.
Answer
B · 500 units
2.Financial accounting
Answer: A · The consideration paid exceeds the fair value of identifiable net assets acquired
Why this is the answer
Goodwill = consideration − fair value of identifiable net assets. Under IFRS it is not amortised but tested for impairment annually.
Answer
A · The consideration paid exceeds the fair value of identifiable net assets acquired
3.Depreciation
Answer: D = 2670 €
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
2/8 = 0.25
Year by year
year 1: 0.25·45 000.00 = €11 250.00
year 2: 0.25·33 750.00 = €8 437.50
year 3: 0.25·25 312.50 = €6 328.13
year 4: 0.25·18 984.38 = €4 746.09
year 5: 0.25·14 238.28 = €3 559.57
year 6: 0.25·10 678.71 = €2 669.68
Answer
D = €2 669.68
4.Depreciation
Answer: D = 4600 €
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
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 23 000·3/15 = €4 600.00
Answer
D = €4 600.00
ExamProblems · examproblems.com/courses/financial-accounting