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 costs are relevant when making a business decision?
- AFuture cash flows that differ between the alternatives
- BAll costs in last year's income statement
- CAllocated fixed overheads that do not change with the decision
- DCosts already paid for the project
2.Financial accountingHard
The standard is 2 labour hours per unit at €20 an hour. 500 units are made in 1,100 hours. What is the labour efficiency variance?
- A€22,000 adverse
- B€1,000 adverse
- C€2,000 favourable
- D€2,000 adverse
3.DepreciationMedium
A machine costs €12 000, has a useful life of 4 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €12 000life = 4salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €24 000, has a useful life of 10 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 7.
cost = €24 000life = 10salvage = €5 000year = 7
D = €
3Solutions
1.Financial accounting
Answer: A · Future cash flows that differ between the alternatives
Why this is the answer
Relevant costs are future, incremental cash flows. Sunk costs, committed costs and unchanged allocated overheads are ignored.
Answer
A · Future cash flows that differ between the alternatives
2.Financial accounting
Answer: D · €2,000 adverse
Why this is the answer
Standard hours = 500 × 2 = 1,000. Extra 100 hours × €20 = €2,000 adverse, because more hours were used than the standard allows.
Answer
D · €2,000 adverse
3.Depreciation
Answer: D = 3000 €
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: 0.5·12 000.00 = €6 000.00
year 2: 0.5·6 000.00 = €3 000.00
Answer
D = €3 000.00
4.Depreciation
Answer: D = 1382 €
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 7
(10 − 7 + 1)/55 = 4/55
Depreciation
D = 19 000·4/55 = €1 381.82
Answer
D = €1 381.82
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