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
Budgeted sales are 1,500 units and the break-even point is 1,000 units. What is the margin of safety?
- A1,000 units
- B2,500 units
- C500 units
- D1,500 units
2.Financial accountingHard
Operating profit is €200,000 and capital employed (equity plus non-current liabilities) is €1,000,000. What is ROCE?
- A20%
- B5%
- C50%
- D2%
3.DepreciationMedium
A machine costs €100 000, has a useful life of 6 years and a salvage value of €5 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €100 000life = 6salvage = €5 000year = 4
D = €
4.DepreciationHard
A machine costs €24 000, has a useful life of 6 years and a salvage value of €3 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €24 000life = 6salvage = €3 500year = 4
D = €
3Solutions
1.Financial accounting
Answer: C · 500 units
Why this is the answer
Margin of safety = budgeted sales − break-even sales = 500 units, or one third of budgeted sales.
Answer
C · 500 units
2.Financial accounting
Answer: A · 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
A · 20%
3.Depreciation
Answer: D = 9877 €
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: 0.3333·100 000.00 = €33 333.33
year 2: 0.3333·66 666.67 = €22 222.22
year 3: 0.3333·44 444.44 = €14 814.81
year 4: 0.3333·29 629.63 = €9 876.54
Answer
D = €9 876.54
4.Depreciation
Answer: D = 2929 €
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
(6 − 4 + 1)/21 = 3/21
Depreciation
D = 20 500·3/21 = €2 928.57
Answer
D = €2 928.57
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