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
Fixed costs are €20,000, the selling price is €50 and the variable cost is €30 per unit. What is the break-even point?
- A2,000 units
- B1,000 units
- C667 units
- D400 units
2.Financial accountingHard
The standard is 2 labour hours per unit at €20 an hour. 500 units are made in 1,100 hours. What is the labour efficiency variance?
- A€22,000 adverse
- B€1,000 adverse
- C€2,000 favourable
- D€2,000 adverse
3.DepreciationMedium
A production line costs €20 000, has a useful life of 10 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €20 000life = 10salvage = €0year = 3
D = €
4.DepreciationHard
A machine costs €12 000, has a useful life of 6 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €12 000life = 6salvage = €0year = 4
D = €
3Solutions
1.Financial accounting
Answer: B · 1,000 units
Why this is the answer
Contribution per unit = €50 − €30 = €20. Break-even = €20,000 ÷ €20 = 1,000 units.
Answer
B · 1,000 units
2.Financial accounting
Answer: D · €2,000 adverse
Why this is the answer
Standard hours = 500 × 2 = 1,000. Extra 100 hours × €20 = €2,000 adverse, because more hours were used than the standard allows.
Answer
D · €2,000 adverse
3.Depreciation
Answer: D = 2560 €
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: 0.2·20 000.00 = €4 000.00
year 2: 0.2·16 000.00 = €3 200.00
year 3: 0.2·12 800.00 = €2 560.00
Answer
D = €2 560.00
4.Depreciation
Answer: D = 1714 €
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 4
(6 − 4 + 1)/21 = 3/21
Depreciation
D = 12 000·3/21 = €1 714.29
Answer
D = €1 714.29
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