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 provision is recognised when a company has:
- AA present obligation from a past event, a probable outflow and a reliable estimate
- BCash set aside in a separate account
- CA profit to distribute
- DA possible future loss with no obligation
2.Financial accountingHard
When does activity-based costing (ABC) give the biggest improvement over traditional absorption costing?
- AWhen overheads are very small compared with direct costs
- BWhen a firm makes only one standard product
- CWhen all costs are variable with labour hours
- DWhen overheads are large and driven by activities like set-ups rather than volume
3.DepreciationMedium
A computer system costs €60 000, has a useful life of 8 years and a salvage value of €3 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €60 000life = 8salvage = €3 000year = 3
D = €
4.DepreciationHard
A delivery van costs €50 000, has a useful life of 10 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €50 000life = 10salvage = €0year = 6
D = €
3Solutions
1.Financial accounting
Answer: A · A present obligation from a past event, a probable outflow and a reliable estimate
Why this is the answer
Provisions are liabilities of uncertain timing or amount. Possible obligations that do not meet the criteria are disclosed as contingent liabilities.
Answer
A · A present obligation from a past event, a probable outflow and a reliable estimate
2.Financial accounting
Answer: D · When overheads are large and driven by activities like set-ups rather than volume
Why this is the answer
ABC assigns overheads using cost drivers for each activity. Where products use activities very differently, a single volume-based rate distorts product costs.
Answer
D · When overheads are large and driven by activities like set-ups rather than volume
3.Depreciation
Answer: D = 8438 €
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: 0.25·60 000.00 = €15 000.00
year 2: 0.25·45 000.00 = €11 250.00
year 3: 0.25·33 750.00 = €8 437.50
Answer
D = €8 437.50
4.Depreciation
Answer: D = 4545 €
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 6
(10 − 6 + 1)/55 = 5/55
Depreciation
D = 50 000·5/55 = €4 545.45
Answer
D = €4 545.45
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