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
An item cost €80. It can be sold for €90, but €20 must be spent to sell it. At what amount is it shown in inventory?
- A€90
- B€80
- C€70
- D€60
2.Financial accountingHard
After the year end, but before the accounts are approved, a customer who owed money at year end goes bankrupt. Under IAS 10 this is:
- AIgnored, because it happened after the year end
- BA change in accounting policy
- CAn adjusting event, so receivables are reduced
- DA non-adjusting event, disclosed only
3.DepreciationMedium
A delivery van costs €30 000, has a useful life of 6 years and a salvage value of €4 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €30 000life = 6salvage = €4 500year = 4
D = €
4.DepreciationHard
A production line costs €120 000, has a useful life of 8 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €120 000life = 8salvage = €12 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · €70
Why this is the answer
NRV = €90 − €20 = €70, which is below cost of €80. Inventory is measured at the lower amount, €70, with a €10 write-down.
Answer
C · €70
2.Financial accounting
Answer: C · An adjusting event, so receivables are reduced
Why this is the answer
The customer's inability to pay existed at year end, so the accounts are adjusted. A fire after year end would be non-adjusting, because it is a new condition.
Answer
C · An adjusting event, so receivables are reduced
3.Depreciation
Answer: D = 2963 €
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
year 4: 0.3333·8 888.89 = €2 962.96
Answer
D = €2 962.96
4.Depreciation
Answer: D = 21000 €
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
(8 − 2 + 1)/36 = 7/36
Depreciation
D = 108 000·7/36 = €21 000.00
Answer
D = €21 000.00
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