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
Under the accrual basis of accounting, revenue is recognised when:
- AThe tax return is filed
- BIt is earned, whether or not cash has been received
- CCash is received
- DThe customer pays the invoice, even if goods were delivered earlier
2.Financial accountingHard
Inventory days are 60, receivable days 45 and payable days 30. What is the cash conversion (operating) cycle?
- A105 days
- B15 days
- C75 days
- D135 days
3.DepreciationMedium
A machine costs €12 000, has a useful life of 5 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 = 5salvage = €2 000year = 3
D = €
4.DepreciationHard
A production line costs €20 000, has a useful life of 4 years and a salvage value of €3 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €20 000life = 4salvage = €3 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · It is earned, whether or not cash has been received
Why this is the answer
Accrual accounting records revenue when the performance obligation is satisfied and expenses when incurred, not when cash moves.
Answer
B · It is earned, whether or not cash has been received
2.Financial accounting
Answer: C · 75 days
Why this is the answer
60 + 45 − 30 = 75 days between paying suppliers and collecting cash from customers. A shorter cycle needs less working capital finance.
Answer
C · 75 days
3.Depreciation
Answer: D = 1728 €
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
2/5 = 0.4
Year by year
year 1: 0.4·12 000.00 = €4 800.00
year 2: 0.4·7 200.00 = €2 880.00
year 3: 0.4·4 320.00 = €1 728.00
Answer
D = €1 728.00
4.Depreciation
Answer: D = 5100 €
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 = 17 000·3/10 = €5 100.00
Answer
D = €5 100.00
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