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
The prudence (conservatism) concept suggests that accountants should:
- AValue assets at their selling price
- BAlways record the highest possible profit to attract investors
- CIgnore possible losses
- DAvoid overstating assets and income under uncertainty
2.Financial accountingHard
Under IFRS, how is purchased goodwill treated after acquisition?
- AIt is revalued upwards every year
- BIt is written off against equity immediately
- CIt is not amortised but tested for impairment at least annually
- DIt is amortised over 20 years
3.DepreciationMedium
A computer system 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 3.
cost = €80 000life = 6salvage = €16 000year = 3
D = €
4.DepreciationHard
A delivery van costs €45 000, has a useful life of 4 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €45 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · Avoid overstating assets and income under uncertainty
Why this is the answer
Prudence means exercising caution so that assets and income are not overstated and liabilities and expenses not understated.
Answer
D · Avoid overstating assets and income under uncertainty
2.Financial accounting
Answer: C · It is not amortised but tested for impairment at least annually
Why this is the answer
Goodwill has an indefinite life under IFRS. It is allocated to cash-generating units and tested for impairment yearly, or more often if there are signs of impairment.
Answer
C · It is not amortised but tested for impairment at least annually
3.Depreciation
Answer: D = 11852 €
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
year 3: 0.3333·35 555.56 = €11 851.85
Answer
D = €11 851.85
4.Depreciation
Answer: D = 13500 €
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
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 45 000·3/10 = €13 500.00
Answer
D = €13 500.00
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