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:
- AThe share price
- BAccumulated profits that have not been paid out as dividends
- CMoney owed to shareholders
- DCash kept in the bank
2.Financial accountingHard
Under IFRS 16, which lease may a lessee choose to expense on a straight-line basis instead of recognising a right-of-use asset?
- AAny lease of land and buildings
- BA ten-year lease of a large production machine
- CAny lease with monthly payments
- DA lease with a term of 12 months or less
3.DepreciationMedium
A machine costs €50 000, has a useful life of 10 years and a salvage value of €7 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €50 000life = 10salvage = €7 500year = 2
D = €
4.DepreciationHard
A machine costs €24 000, has a useful life of 8 years and a salvage value of €1 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €24 000life = 8salvage = €1 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: B · 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
B · Accumulated profits that have not been paid out as dividends
2.Financial accounting
Answer: D · A lease with a term of 12 months or less
Why this is the answer
Lessees may elect not to recognise short-term leases (12 months or less) and leases of low-value assets, expensing the payments instead.
Answer
D · A lease with a term of 12 months or less
3.Depreciation
Answer: D = 8000 €
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: 0.2·50 000.00 = €10 000.00
year 2: 0.2·40 000.00 = €8 000.00
Answer
D = €8 000.00
4.Depreciation
Answer: D = 1917 €
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 = 23 000·3/36 = €1 916.67
Answer
D = €1 916.67
ExamProblems · examproblems.com/courses/financial-accounting