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 project has a positive net present value (NPV) at the company's cost of capital. This means:
- AIt earns more than the required return and should add value
- BIt recovers its cost within one year
- CIt has no risk at all
- DIts reported accounting profit will be positive in every year
2.Financial accountingHard
An investor holds 30% of a company's shares and has significant influence but not control. How is the investment usually accounted for in group accounts?
- AAt cost with no changes ever
- BBy full consolidation as a subsidiary
- CUsing the equity method as an associate
- DAs a joint operation with line-by-line sharing
3.DepreciationMedium
A delivery van costs €120 000, has a useful life of 8 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 6.
cost = €120 000life = 8salvage = €0year = 6
D = €
4.DepreciationHard
A machine costs €120 000, has a useful life of 10 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 7.
cost = €120 000life = 10salvage = €12 000year = 7
D = €
3Solutions
1.Financial accounting
Answer: A · It earns more than the required return and should add value
Why this is the answer
A positive NPV means the present value of inflows exceeds the investment at the required rate, so the project increases shareholder wealth.
Answer
A · It earns more than the required return and should add value
2.Financial accounting
Answer: C · Using the equity method as an associate
Why this is the answer
Under IAS 28 the investment starts at cost and is adjusted for the investor's share of the associate's profits or losses, less dividends received.
Answer
C · Using the equity method as an associate
3.Depreciation
Answer: D = 7119 €
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
2/8 = 0.25
Year by year
year 1: 0.25·120 000.00 = €30 000.00
year 2: 0.25·90 000.00 = €22 500.00
year 3: 0.25·67 500.00 = €16 875.00
year 4: 0.25·50 625.00 = €12 656.25
year 5: 0.25·37 968.75 = €9 492.19
year 6: 0.25·28 476.56 = €7 119.14
Answer
D = €7 119.14
4.Depreciation
Answer: D = 7855 €
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 7
(10 − 7 + 1)/55 = 4/55
Depreciation
D = 108 000·4/55 = €7 854.55
Answer
D = €7 854.55
ExamProblems · examproblems.com/courses/financial-accounting