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
Revenue is €200,000 and cost of sales is €140,000. What is the gross profit margin?
- A30%
- B43%
- C70%
- D60%
2.Financial accountingHard
Under IFRS, how is purchased goodwill treated after acquisition?
- AIt is amortised over 20 years
- BIt is revalued upwards every year
- CIt is not amortised but tested for impairment at least annually
- DIt is written off against equity immediately
3.DepreciationMedium
A machine costs €120 000, has a useful life of 5 years and a salvage value of €12 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €120 000life = 5salvage = €12 000year = 3
D = €
4.DepreciationHard
A delivery van costs €80 000, has a useful life of 5 years and a salvage value of €16 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €80 000life = 5salvage = €16 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · 30%
Why this is the answer
Gross profit = €60,000. Margin = €60,000 ÷ €200,000 = 30%.
Answer
A · 30%
2.Financial accounting
Answer: C · It is not amortised but tested for impairment at least annually
Why this is the answer
Goodwill has an indefinite life under IFRS. It is allocated to cash-generating units and tested for impairment yearly, or more often if there are signs of impairment.
Answer
C · It is not amortised but tested for impairment at least annually
3.Depreciation
Answer: D = 17280 €
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
2/5 = 0.4
Year by year
year 1: 0.4·120 000.00 = €48 000.00
year 2: 0.4·72 000.00 = €28 800.00
year 3: 0.4·43 200.00 = €17 280.00
Answer
D = €17 280.00
4.Depreciation
Answer: D = 12800 €
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 3
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 64 000·3/15 = €12 800.00
Answer
D = €12 800.00
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