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
Which depreciation method charges the same amount every year?
- AReducing balance
- BSum-of-the-years'-digits
- CStraight-line
- DUnits of production
2.Financial accountingHard
Operating profit is €200,000 and capital employed (equity plus non-current liabilities) is €1,000,000. What is ROCE?
- A2%
- B50%
- C5%
- D20%
3.DepreciationMedium
A production line costs €30 000, has a useful life of 4 years and a salvage value of €6 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €6 000year = 2
D = €
4.DepreciationHard
A delivery van costs €50 000, has a useful life of 10 years and a salvage value of €7 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €50 000life = 10salvage = €7 500year = 4
D = €
3Solutions
1.Financial accounting
Answer: C · Straight-line
Why this is the answer
Straight-line spreads the depreciable amount evenly. Reducing balance charges more in early years; units of production follows actual use.
Answer
C · Straight-line
2.Financial accounting
Answer: D · 20%
Why this is the answer
ROCE = €200,000 ÷ €1,000,000 = 20%. It measures returns on all long-term finance, so it can be compared with the cost of borrowing.
Answer
D · 20%
3.Depreciation
Answer: D = 7500 €
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
2/4 = 0.5
Year by year
year 1: 0.5·30 000.00 = €15 000.00
year 2: 0.5·15 000.00 = €7 500.00
Answer
D = €7 500.00
4.Depreciation
Answer: D = 5409 €
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 4
(10 − 4 + 1)/55 = 7/55
Depreciation
D = 42 500·7/55 = €5 409.09
Answer
D = €5 409.09
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