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:
- AIts reported accounting profit will be positive in every year
- BIt earns more than the required return and should add value
- CIt recovers its cost within one year
- DIt has no risk at all
2.Financial accountingHard
Under the matching principle, the cost of a product warranty sold with goods this year should be:
- ARecognised only when a customer actually makes a warranty claim
- BEstimated and recognised as an expense in the year of sale
- CRecorded as revenue
- DIgnored until the warranty expires
3.DepreciationMedium
A computer system costs €24 000, has a useful life of 6 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 = 6salvage = €2 500year = 4
D = €
4.DepreciationHard
A delivery van costs €45 000, has a useful life of 10 years and a salvage value of €4 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €45 000life = 10salvage = €4 500year = 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 · Estimated and recognised as an expense in the year of sale
Why this is the answer
A provision for expected warranty costs is recognised when the goods are sold, matching the expense with the related revenue (IAS 37).
Answer
B · Estimated and recognised as an expense in the year of sale
3.Depreciation
Answer: D = 2370 €
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: 0.3333·24 000.00 = €8 000.00
year 2: 0.3333·16 000.00 = €5 333.33
year 3: 0.3333·10 666.67 = €3 555.56
year 4: 0.3333·7 111.11 = €2 370.37
Answer
D = €2 370.37
4.Depreciation
Answer: D = 5891 €
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
(10 − 3 + 1)/55 = 8/55
Depreciation
D = 40 500·8/55 = €5 890.91
Answer
D = €5 890.91
ExamProblems · examproblems.com/courses/financial-accounting