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
Retained earnings represent:
- AMoney owed to shareholders
- BCash kept in the bank
- CAccumulated profits that have not been paid out as dividends
- DThe share price
2.Financial accountingHard
A company records routine repair costs as additions to non-current assets instead of expenses. What is the effect this year?
- AOnly cash is affected
- BProfit is understated and assets are overstated
- CProfit and assets are understated
- DProfit and assets are overstated
3.DepreciationMedium
A delivery van costs €60 000, has a useful life of 6 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €60 000life = 6salvage = €0year = 3
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 8 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €120 000life = 8salvage = €6 000year = 5
D = €
3Solutions
1.Financial accounting
Answer: C · Accumulated profits that have not been paid out as dividends
Why this is the answer
Retained earnings are cumulative net profits minus dividends; they are part of equity, not a pile of cash.
Answer
C · Accumulated profits that have not been paid out as dividends
2.Financial accounting
Answer: D · Profit and assets are overstated
Why this is the answer
Capitalising expenses moves cost out of profit into assets, so both are overstated now. Later depreciation spreads the cost over future years.
Answer
D · Profit and assets are overstated
3.Depreciation
Answer: D = 8889 €
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: 0.3333·60 000.00 = €20 000.00
year 2: 0.3333·40 000.00 = €13 333.33
year 3: 0.3333·26 666.67 = €8 888.89
Answer
D = €8 888.89
4.Depreciation
Answer: D = 12667 €
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 5
(8 − 5 + 1)/36 = 4/36
Depreciation
D = 114 000·4/36 = €12 666.67
Answer
D = €12 666.67
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