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 project has a positive net present value (NPV) at the company's cost of capital. This means:
- AIt has no risk at all
- BIt earns more than the required return and should add value
- CIt recovers its cost within one year
- DIts reported accounting profit will be positive in every year
2.Financial accountingHard
Machine hours are scarce. Product X earns €20 contribution and needs 4 hours; product Y earns €15 and needs 2 hours. Which should be made first?
- AX, because it uses more machine time
- BY, because it earns €7.50 per hour versus €5 for X
- CEither, because the total contribution is the same
- DX, because it earns more contribution per unit
3.DepreciationMedium
A delivery van costs €120 000, has a useful life of 4 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 2.
cost = €120 000life = 4salvage = €0year = 2
D = €
4.DepreciationHard
A production line costs €50 000, has a useful life of 5 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €50 000life = 5salvage = €0year = 3
D = €
3Solutions
1.Financial accounting
Answer: B · It earns more than the required return and should add value
Why this is the answer
A positive NPV means the present value of inflows exceeds the investment at the required rate, so the project increases shareholder wealth.
Answer
B · It earns more than the required return and should add value
2.Financial accounting
Answer: B · Y, because it earns €7.50 per hour versus €5 for X
Why this is the answer
X earns €20 ÷ 4 = €5 per hour, Y earns €15 ÷ 2 = €7.50 per hour. With a scarce resource, maximise contribution per scarce hour.
Answer
B · Y, because it earns €7.50 per hour versus €5 for X
3.Depreciation
Answer: D = 30000 €
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: 0.5·120 000.00 = €60 000.00
year 2: 0.5·60 000.00 = €30 000.00
Answer
D = €30 000.00
4.Depreciation
Answer: D = 10000 €
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
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 50 000·3/15 = €10 000.00
Answer
D = €10 000.00
ExamProblems · examproblems.com/courses/financial-accounting