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
Profit for ordinary shareholders is €500,000 and there are 1,000,000 ordinary shares. What are basic earnings per share?
- A€0.50
- B€2.00
- C€5.00
- D€0.05
2.Financial accountingHard
Operating profit is €200,000 and capital employed (equity plus non-current liabilities) is €1,000,000. What is ROCE?
- A5%
- B50%
- C2%
- D20%
3.DepreciationMedium
A computer system costs €80 000, has a useful life of 4 years and a salvage value of €12 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €80 000life = 4salvage = €12 000year = 2
D = €
4.DepreciationHard
A production line costs €24 000, has a useful life of 4 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €24 000life = 4salvage = €5 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · €0.50
Why this is the answer
Basic EPS = €500,000 ÷ 1,000,000 = €0.50 per share. Dividing the share price by EPS gives the P/E ratio.
Answer
A · €0.50
2.Financial accounting
Answer: D · 20%
Why this is the answer
ROCE = €200,000 ÷ €1,000,000 = 20%. It measures returns on all long-term finance, so it can be compared with the cost of borrowing.
Answer
D · 20%
3.Depreciation
Answer: D = 20000 €
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: 0.5·80 000.00 = €40 000.00
year 2: 0.5·40 000.00 = €20 000.00
Answer
D = €20 000.00
4.Depreciation
Answer: D = 5700 €
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 2
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 19 000·3/10 = €5 700.00
Answer
D = €5 700.00
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