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
When preparing a bank reconciliation, which item explains why the bank statement balance is higher than the cash book balance?
- AA direct debit not yet entered in the cash book
- BCheques issued but not yet presented to the bank
- CCash deposited but not yet credited on the bank statement
- DBank charges not yet entered in the cash book
2.Financial accountingHard
Making a part costs €10 materials, €6 labour and €4 variable overhead, plus €5 of fixed overhead that continues anyway. A supplier offers it at €22. What should the firm do on cost grounds?
- ABuy it, because fixed costs are always relevant
- BMake it, because the full cost of €25 is below €22
- CBuy it, because the full cost of €25 per unit is above €22
- DMake it, because the relevant cost of €20 is below €22
3.DepreciationMedium
A machine costs €30 000, has a useful life of 6 years and a salvage value of €1 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €30 000life = 6salvage = €1 500year = 3
D = €
4.DepreciationHard
A production line 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: B · Cheques issued but not yet presented to the bank
Why this is the answer
Unpresented cheques have reduced the cash book but not the bank balance. Outstanding deposits, bank charges and unrecorded direct debits work the other way.
Answer
B · Cheques issued but not yet presented to the bank
2.Financial accounting
Answer: D · Make it, because the relevant cost of €20 is below €22
Why this is the answer
Only the €20 of variable cost is avoided by buying; the €5 fixed overhead stays. Making costs €20 versus €22 to buy, so making saves €2 per unit.
Answer
D · Make it, because the relevant cost of €20 is below €22
3.Depreciation
Answer: D = 4444 €
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: 0.3333·30 000.00 = €10 000.00
year 2: 0.3333·20 000.00 = €6 666.67
year 3: 0.3333·13 333.33 = €4 444.44
Answer
D = €4 444.44
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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