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
Why can a profitable company run out of cash?
- AProfit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
- BProfitable companies never pay taxes
- CCash is not recorded in accounting
- DProfit always equals cash
2.Financial accountingHard
Under the IAS 16 revaluation model, a building is revalued upwards for the first time. Where does the gain go?
- ATo other comprehensive income and a revaluation surplus in equity
- BTo retained earnings as a realised profit
- CTo a provision on the balance sheet
- DTo revenue in the income statement
3.DepreciationMedium
A production line costs €80 000, has a useful life of 5 years and a salvage value of €12 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €80 000life = 5salvage = €12 000year = 3
D = €
4.DepreciationHard
A computer system costs €45 000, has a useful life of 8 years and a salvage value of €4 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €45 000life = 8salvage = €4 500year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
Why this is the answer
Profit is measured on an accrual basis; growth can tie up cash in inventory and receivables, so cash flow can be negative despite profits.
Answer
A · Profit includes credit sales and non-cash items, while cash may be tied up in receivables and inventory
2.Financial accounting
Answer: A · To other comprehensive income and a revaluation surplus in equity
Why this is the answer
Upward revaluations are credited to a revaluation surplus via OCI, unless they reverse an earlier decrease recognised in profit or loss.
Answer
A · To other comprehensive income and a revaluation surplus in equity
3.Depreciation
Answer: D = 11520 €
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: 0.4·80 000.00 = €32 000.00
year 2: 0.4·48 000.00 = €19 200.00
year 3: 0.4·28 800.00 = €11 520.00
Answer
D = €11 520.00
4.Depreciation
Answer: D = 6750 €
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 = 40 500·6/36 = €6 750.00
Answer
D = €6 750.00
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