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 shop buys 100 units at €10, then 100 units at €12, and then sells 150 units. What is cost of sales using FIFO?
- A€1,700
- B€1,650
- C€1,500
- D€1,600
2.Financial accountingHard
A company changes its inventory method from weighted average to FIFO because it gives more relevant information. Under IAS 8, how is this applied?
- AProspectively, from the date of the change only
- BIt is not allowed to change inventory methods
- CRetrospectively, restating comparative figures as if FIFO had always been used
- DBy recognising the whole effect as income this year
3.DepreciationMedium
A production line costs €24 000, has a useful life of 4 years and a salvage value of €1 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €24 000life = 4salvage = €1 000year = 2
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 8 years and a salvage value of €24 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €120 000life = 8salvage = €24 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · €1,600
Why this is the answer
FIFO: 100 × €10 + 50 × €12 = €1,600. The 50 units left are valued at the latest cost of €12.
Answer
D · €1,600
2.Financial accounting
Answer: C · Retrospectively, restating comparative figures as if FIFO had always been used
Why this is the answer
Voluntary policy changes are applied retrospectively where practicable, so comparatives remain consistent. Changes in estimates, by contrast, are applied prospectively.
Answer
C · Retrospectively, restating comparative figures as if FIFO had always been used
3.Depreciation
Answer: D = 6000 €
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: 0.5·24 000.00 = €12 000.00
year 2: 0.5·12 000.00 = €6 000.00
Answer
D = €6 000.00
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 4
(8 − 4 + 1)/36 = 5/36
Depreciation
D = 96 000·5/36 = €13 333.33
Answer
D = €13 333.33
ExamProblems · examproblems.com/courses/financial-accounting