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
Under IAS 38, how are research and development costs treated?
- ABoth are always expensed immediately
- BResearch is capitalised; development is expensed
- CBoth are always capitalised as intangible assets
- DResearch is expensed; development is capitalised only when strict criteria are met
2.Financial accountingHard
Under IFRS 16, which lease may a lessee choose to expense on a straight-line basis instead of recognising a right-of-use asset?
- AAny lease with monthly payments
- BA lease with a term of 12 months or less
- CA ten-year lease of a large production machine
- DAny lease of land and buildings
3.DepreciationMedium
A production line costs €50 000, has a useful life of 10 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 5.
cost = €50 000life = 10salvage = €0year = 5
D = €
4.DepreciationHard
A computer system costs €50 000, has a useful life of 6 years and a salvage value of €2 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €50 000life = 6salvage = €2 500year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · Research is expensed; development is capitalised only when strict criteria are met
Why this is the answer
Research costs are always expensed. Development costs are capitalised when, for example, technical feasibility, intention, ability and probable future benefits can be shown.
Answer
D · Research is expensed; development is capitalised only when strict criteria are met
2.Financial accounting
Answer: B · A lease with a term of 12 months or less
Why this is the answer
Lessees may elect not to recognise short-term leases (12 months or less) and leases of low-value assets, expensing the payments instead.
Answer
B · A lease with a term of 12 months or less
3.Depreciation
Answer: D = 4096 €
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: 0.2·50 000.00 = €10 000.00
year 2: 0.2·40 000.00 = €8 000.00
year 3: 0.2·32 000.00 = €6 400.00
year 4: 0.2·25 600.00 = €5 120.00
year 5: 0.2·20 480.00 = €4 096.00
Answer
D = €4 096.00
4.Depreciation
Answer: D = 6786 €
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 = 47 500·3/21 = €6 785.71
Answer
D = €6 785.71
ExamProblems · examproblems.com/courses/financial-accounting