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
Profit for ordinary shareholders is €500,000 and there are 1,000,000 ordinary shares. What are basic earnings per share?
- A€0.50
- B€0.05
- C€2.00
- D€5.00
2.Financial accountingHard
Goodwill arises in a business combination when:
- AAssets are revalued upwards
- BThe acquired company makes a loss
- CThe consideration paid exceeds the fair value of identifiable net assets acquired
- DA company has a good reputation
3.DepreciationMedium
A delivery van costs €100 000, has a useful life of 10 years and a salvage value of €20 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 7.
cost = €100 000life = 10salvage = €20 000year = 7
D = €
4.DepreciationHard
A computer system costs €100 000, has a useful life of 8 years and a salvage value of €10 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €100 000life = 8salvage = €10 000year = 5
D = €
3Solutions
1.Financial accounting
Answer: A · €0.50
Why this is the answer
Basic EPS = €500,000 ÷ 1,000,000 = €0.50 per share. Dividing the share price by EPS gives the P/E ratio.
Answer
A · €0.50
2.Financial accounting
Answer: C · The consideration paid exceeds the fair value of identifiable net assets acquired
Why this is the answer
Goodwill = consideration − fair value of identifiable net assets. Under IFRS it is not amortised but tested for impairment annually.
Answer
C · The consideration paid exceeds the fair value of identifiable net assets acquired
3.Depreciation
Answer: D = 5243 €
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: 0.2·100 000.00 = €20 000.00
year 2: 0.2·80 000.00 = €16 000.00
year 3: 0.2·64 000.00 = €12 800.00
year 4: 0.2·51 200.00 = €10 240.00
year 5: 0.2·40 960.00 = €8 192.00
year 6: 0.2·32 768.00 = €6 553.60
year 7: 0.2·26 214.40 = €5 242.88
Answer
D = €5 242.88
4.Depreciation
Answer: D = 10000 €
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 5
(8 − 5 + 1)/36 = 4/36
Depreciation
D = 90 000·4/36 = €10 000.00
Answer
D = €10 000.00
ExamProblems · examproblems.com/courses/financial-accounting