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 company finds that a machine will last 8 years instead of the 5 originally estimated. Under IAS 8, how is this change applied?
- ABy recognising a large gain in the current year
- BRetrospectively, by restating all prior years
- CBy changing the original cost of the machine
- DProspectively, by spreading the remaining carrying amount over the new remaining life
2.Financial accountingHard
A firm has spent €50,000 on market research for a new product and must decide whether to launch it. How should the €50,000 be treated in the decision?
- ADeducted from expected sales
- BAdded to the launch cost
- CSpread over the product's expected life
- DIgnored, because it is a sunk cost
3.DepreciationMedium
A delivery van costs €24 000, has a useful life of 5 years and a salvage value of €3 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €24 000life = 5salvage = €3 500year = 3
D = €
4.DepreciationHard
A computer system costs €100 000, has a useful life of 8 years and a salvage value of €20 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €100 000life = 8salvage = €20 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: D · Prospectively, by spreading the remaining carrying amount over the new remaining life
Why this is the answer
Changes in estimates affect the current and future periods only. Prior-period restatement is for changes in policy and corrections of errors.
Answer
D · Prospectively, by spreading the remaining carrying amount over the new remaining life
2.Financial accounting
Answer: D · Ignored, because it is a sunk cost
Why this is the answer
The research money is spent whichever choice is made, so it is irrelevant. Only future incremental cash flows from launching should be compared.
Answer
D · Ignored, because it is a sunk cost
3.Depreciation
Answer: D = 3456 €
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: 0.4·24 000.00 = €9 600.00
year 2: 0.4·14 400.00 = €5 760.00
year 3: 0.4·8 640.00 = €3 456.00
Answer
D = €3 456.00
4.Depreciation
Answer: D = 13333 €
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
(8 − 3 + 1)/36 = 6/36
Depreciation
D = 80 000·6/36 = €13 333.33
Answer
D = €13 333.33
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