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
A company is being sued. Its lawyers say losing is possible but not probable. How is this treated under IAS 37?
- ADisclosed as a contingent liability in the notes
- BIgnored completely
- CRecognised as an expense and paid into a reserve
- DRecognised as a provision on the balance sheet
2.Financial accountingHard
The standard price of material is €5 per kg. The company buys 1,000 kg for €5,400. What is the material price variance?
- A€0.40 adverse
- B€400 adverse
- C€5,400 adverse
- D€400 favourable
3.DepreciationMedium
A delivery van costs €24 000, has a useful life of 5 years and a salvage value of €3 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €24 000life = 5salvage = €3 500year = 2
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 4 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €120 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · Disclosed as a contingent liability in the notes
Why this is the answer
A possible obligation is not recognised but disclosed, unless the chance of outflow is remote. A probable, measurable outflow would require a provision.
Answer
A · Disclosed as a contingent liability in the notes
2.Financial accounting
Answer: B · €400 adverse
Why this is the answer
Standard cost of 1,000 kg = €5,000; actual cost = €5,400. Paying more than standard gives a €400 adverse price variance.
Answer
B · €400 adverse
3.Depreciation
Answer: D = 5760 €
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
2/5 = 0.4
Year by year
year 1: 0.4·24 000.00 = €9 600.00
year 2: 0.4·14 400.00 = €5 760.00
Answer
D = €5 760.00
4.Depreciation
Answer: D = 36000 €
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 = 120 000·3/10 = €36 000.00
Answer
D = €36 000.00
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