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 firm buys 200 units at €5 and 300 units at €6, then sells 400 units. Using weighted average cost, what is closing inventory?
- A€600
- B€560
- C€550
- D€500
2.Financial accountingHard
Under the IAS 16 revaluation model, a building is revalued upwards for the first time. Where does the gain go?
- ATo a provision on the balance sheet
- BTo retained earnings as a realised profit
- CTo revenue in the income statement
- DTo other comprehensive income and a revaluation surplus in equity
3.DepreciationMedium
A delivery van costs €60 000, has a useful life of 4 years and a salvage value of €9 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €60 000life = 4salvage = €9 000year = 2
D = €
4.DepreciationHard
A delivery van costs €45 000, has a useful life of 8 years and a salvage value of €9 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €45 000life = 8salvage = €9 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: B · €560
Why this is the answer
Average cost = (€1,000 + €1,800) ÷ 500 = €5.60. Closing inventory = 100 × €5.60 = €560.
Answer
B · €560
2.Financial accounting
Answer: D · 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
D · To other comprehensive income and a revaluation surplus in equity
3.Depreciation
Answer: D = 15000 €
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: 0.5·60 000.00 = €30 000.00
year 2: 0.5·30 000.00 = €15 000.00
Answer
D = €15 000.00
4.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).
Fraction for year 3
(8 − 3 + 1)/36 = 6/36
Depreciation
D = 36 000·6/36 = €6 000.00
Answer
D = €6 000.00
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