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
An item cost €80. It can be sold for €90, but €20 must be spent to sell it. At what amount is it shown in inventory?
- A€90
- B€60
- C€80
- D€70
2.Financial accountingHard
Closing inventory this year is overstated by €10,000 by mistake. What is the effect on profit, if not corrected?
- AOnly this year's profit is understated
- BThis year's profit is overstated and next year's understated by €10,000
- CProfit is unaffected; only the balance sheet changes
- DBoth years' profits are overstated
3.DepreciationMedium
A computer system costs €30 000, has a useful life of 6 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 2.
cost = €30 000life = 6salvage = €3 000year = 2
D = €
4.DepreciationHard
A computer system costs €100 000, has a useful life of 4 years and a salvage value of €10 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €100 000life = 4salvage = €10 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · €70
Why this is the answer
NRV = €90 − €20 = €70, which is below cost of €80. Inventory is measured at the lower amount, €70, with a €10 write-down.
Answer
D · €70
2.Financial accounting
Answer: B · This year's profit is overstated and next year's understated by €10,000
Why this is the answer
Higher closing inventory reduces cost of sales, raising this year's profit. Next year opening inventory is too high, increasing cost of sales and lowering profit by the same amount.
Answer
B · This year's profit is overstated and next year's understated by €10,000
3.Depreciation
Answer: D = 6667 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·30 000.00 = €10 000.00
year 2: 0.3333·20 000.00 = €6 666.67
Answer
D = €6 666.67
4.Depreciation
Answer: D = 27000 €
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 2
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 90 000·3/10 = €27 000.00
Answer
D = €27 000.00
ExamProblems · examproblems.com/courses/financial-accounting