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 recovers its cost within one year
- BIts reported accounting profit will be positive in every year
- CIt earns more than the required return and should add value
- DIt has no risk at all
2.Financial accountingHard
Under IFRS, how is purchased goodwill treated after acquisition?
- AIt is amortised over 20 years
- BIt is not amortised but tested for impairment at least annually
- CIt is written off against equity immediately
- DIt is revalued upwards every year
3.DepreciationMedium
A machine costs €30 000, has a useful life of 8 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 = €30 000life = 8salvage = €0year = 3
D = €
4.DepreciationHard
A production line costs €12 000, has a useful life of 6 years and a salvage value of €2 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €12 000life = 6salvage = €2 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · 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
C · It earns more than the required return and should add value
2.Financial accounting
Answer: B · It is not amortised but tested for impairment at least annually
Why this is the answer
Goodwill has an indefinite life under IFRS. It is allocated to cash-generating units and tested for impairment yearly, or more often if there are signs of impairment.
Answer
B · It is not amortised but tested for impairment at least annually
3.Depreciation
Answer: D = 4219 €
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: 0.25·30 000.00 = €7 500.00
year 2: 0.25·22 500.00 = €5 625.00
year 3: 0.25·16 875.00 = €4 218.75
Answer
D = €4 218.75
4.Depreciation
Answer: D = 2381 €
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
(6 − 2 + 1)/21 = 5/21
Depreciation
D = 10 000·5/21 = €2 380.95
Answer
D = €2 380.95
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