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 machine with a carrying amount of €3,000 is sold for €4,000. What is recorded in the income statement?
- AA gain on disposal of €1,000
- BRevenue of €4,000
- CA loss on disposal of €1,000
- DA gain on disposal of €4,000
2.Financial accountingHard
A company's debt-to-equity ratio rises sharply. What does this usually indicate?
- AHigher financial risk because the company relies more on borrowed money
- BThat shareholders invested more money
- CBetter liquidity in the short term
- DHigher profitability
3.DepreciationMedium
A computer system costs €12 000, has a useful life of 10 years and a salvage value of €2 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €12 000life = 10salvage = €2 000year = 3
D = €
4.DepreciationHard
A production line costs €12 000, has a useful life of 5 years and a salvage value of €1 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €12 000life = 5salvage = €1 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · A gain on disposal of €1,000
Why this is the answer
Gain or loss on disposal = proceeds − carrying amount = €4,000 − €3,000 = €1,000 gain. It is not part of normal revenue.
Answer
A · A gain on disposal of €1,000
2.Financial accounting
Answer: A · Higher financial risk because the company relies more on borrowed money
Why this is the answer
A higher ratio means more leverage: interest and repayments must be met whatever the results, so financial risk rises, although returns to shareholders may also rise.
Answer
A · Higher financial risk because the company relies more on borrowed money
3.Depreciation
Answer: D = 1536 €
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
2/10 = 0.2
Year by year
year 1: 0.2·12 000.00 = €2 400.00
year 2: 0.2·9 600.00 = €1 920.00
year 3: 0.2·7 680.00 = €1 536.00
Answer
D = €1 536.00
4.Depreciation
Answer: D = 2933 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 11 000·4/15 = €2 933.33
Answer
D = €2 933.33
ExamProblems · examproblems.com/courses/financial-accounting