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
Retained earnings represent:
- ACash kept in the bank
- BMoney owed to shareholders
- CThe share price
- DAccumulated profits that have not been paid out as dividends
2.Financial accountingHard
A company "sells" inventory to a bank and must buy it back later at a higher price, keeping the risks and rewards. How should it be accounted for?
- AAs a gain on disposal of inventory
- BAs revenue on the date of transfer
- CAs a secured loan, not a sale
- DAs a contingent asset in the notes
3.DepreciationMedium
A machine costs €80 000, has a useful life of 6 years and a salvage value of €16 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €80 000life = 6salvage = €16 000year = 2
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 6.
cost = €45 000life = 8salvage = €4 500year = 6
D = €
3Solutions
1.Financial accounting
Answer: D · Accumulated profits that have not been paid out as dividends
Why this is the answer
Retained earnings are cumulative net profits minus dividends; they are part of equity, not a pile of cash.
Answer
D · Accumulated profits that have not been paid out as dividends
2.Financial accounting
Answer: C · As a secured loan, not a sale
Why this is the answer
Control and risks stay with the company, so the transaction is in substance borrowing secured on inventory. The price difference is an interest cost.
Answer
C · As a secured loan, not a sale
3.Depreciation
Answer: D = 17778 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·80 000.00 = €26 666.67
year 2: 0.3333·53 333.33 = €17 777.78
Answer
D = €17 777.78
4.Depreciation
Answer: D = 3375 €
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 6
(8 − 6 + 1)/36 = 3/36
Depreciation
D = 40 500·3/36 = €3 375.00
Answer
D = €3 375.00
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