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
Which costs are relevant when making a business decision?
- AAllocated fixed overheads that do not change with the decision
- BAll costs in last year's income statement
- CCosts already paid for the project
- DFuture cash flows that differ between the alternatives
2.Financial accountingHard
Under IFRS 16, a lessee typically recognises a lease on the balance sheet as:
- AAn operating expense only, spread evenly over the lease term
- BEquity and a provision
- CRevenue and inventory
- DA right-of-use asset and a lease liability
3.DepreciationMedium
A computer system costs €120 000, has a useful life of 10 years and a salvage value of €6 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 7.
cost = €120 000life = 10salvage = €6 000year = 7
D = €
4.DepreciationHard
A delivery van costs €120 000, has a useful life of 6 years and a salvage value of €18 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €120 000life = 6salvage = €18 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · Future cash flows that differ between the alternatives
Why this is the answer
Relevant costs are future, incremental cash flows. Sunk costs, committed costs and unchanged allocated overheads are ignored.
Answer
D · Future cash flows that differ between the alternatives
2.Financial accounting
Answer: D · A right-of-use asset and a lease liability
Why this is the answer
IFRS 16 removed the operating lease distinction for lessees: they recognise a right-of-use asset and a liability for lease payments, except for short-term and low-value leases.
Answer
D · A right-of-use asset and a lease liability
3.Depreciation
Answer: D = 6291 €
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
2/10 = 0.2
Year by year
year 1: 0.2·120 000.00 = €24 000.00
year 2: 0.2·96 000.00 = €19 200.00
year 3: 0.2·76 800.00 = €15 360.00
year 4: 0.2·61 440.00 = €12 288.00
year 5: 0.2·49 152.00 = €9 830.40
year 6: 0.2·39 321.60 = €7 864.32
year 7: 0.2·31 457.28 = €6 291.46
Answer
D = €6 291.46
4.Depreciation
Answer: D = 24286 €
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
(6 − 2 + 1)/21 = 5/21
Depreciation
D = 102 000·5/21 = €24 285.71
Answer
D = €24 285.71
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