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?
- AFuture cash flows that differ between the alternatives
- BAll costs in last year's income statement
- CAllocated fixed overheads that do not change with the decision
- DCosts already paid for the project
2.Financial accountingHard
Making a part costs €10 materials, €6 labour and €4 variable overhead, plus €5 of fixed overhead that continues anyway. A supplier offers it at €22. What should the firm do on cost grounds?
- AMake it, because the full cost of €25 is below €22
- BBuy it, because the full cost of €25 per unit is above €22
- CMake it, because the relevant cost of €20 is below €22
- DBuy it, because fixed costs are always relevant
3.DepreciationMedium
A machine costs €60 000, 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 3.
cost = €60 000life = 10salvage = €6 000year = 3
D = €
4.DepreciationHard
A delivery van costs €24 000, has a useful life of 4 years and a salvage value of €1 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €24 000life = 4salvage = €1 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · 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
A · Future cash flows that differ between the alternatives
2.Financial accounting
Answer: C · Make it, because the relevant cost of €20 is below €22
Why this is the answer
Only the €20 of variable cost is avoided by buying; the €5 fixed overhead stays. Making costs €20 versus €22 to buy, so making saves €2 per unit.
Answer
C · Make it, because the relevant cost of €20 is below €22
3.Depreciation
Answer: D = 7680 €
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: 0.2·60 000.00 = €12 000.00
year 2: 0.2·48 000.00 = €9 600.00
year 3: 0.2·38 400.00 = €7 680.00
Answer
D = €7 680.00
4.Depreciation
Answer: D = 6900 €
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 = 23 000·3/10 = €6 900.00
Answer
D = €6 900.00
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