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 product sells for €40 and has a variable cost of €30. What is its contribution-to-sales (C/S) ratio?
- A10%
- B33%
- C25%
- D75%
2.Financial accountingHard
An asset has a carrying amount of €500,000, fair value less costs of disposal of €380,000 and value in use of €420,000. What impairment loss is recognised?
- A€120,000
- B€80,000
- C€200,000
- D€0
3.DepreciationMedium
A production line costs €24 000, has a useful life of 8 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €24 000life = 8salvage = €2 500year = 4
D = €
4.DepreciationHard
A production line costs €20 000, has a useful life of 10 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 = €20 000life = 10salvage = €1 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: C · 25%
Why this is the answer
Contribution = €10. C/S ratio = €10 ÷ €40 = 25%. Fixed costs ÷ C/S ratio gives break-even revenue.
Answer
C · 25%
2.Financial accounting
Answer: B · €80,000
Why this is the answer
Recoverable amount = max(€380,000, €420,000) = €420,000. Impairment = €500,000 − €420,000 = €80,000.
Answer
B · €80,000
3.Depreciation
Answer: D = 2531 €
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
2/8 = 0.25
Year by year
year 1: 0.25·24 000.00 = €6 000.00
year 2: 0.25·18 000.00 = €4 500.00
year 3: 0.25·13 500.00 = €3 375.00
year 4: 0.25·10 125.00 = €2 531.25
Answer
D = €2 531.25
4.Depreciation
Answer: D = 1727 €
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
(10 − 6 + 1)/55 = 5/55
Depreciation
D = 19 000·5/55 = €1 727.27
Answer
D = €1 727.27
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