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
The prudence (conservatism) concept suggests that accountants should:
- AAlways record the highest possible profit to attract investors
- BValue assets at their selling price
- CIgnore possible losses
- DAvoid overstating assets and income under uncertainty
2.Financial accountingHard
The going concern assumption means financial statements are prepared assuming the entity:
- AWill be sold within one year
- BHas no debts
- CWill continue to operate for the foreseeable future
- DWill make a profit every year
3.DepreciationMedium
A production line costs €24 000, has a useful life of 10 years and a salvage value of €5 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 5.
cost = €24 000life = 10salvage = €5 000year = 5
D = €
4.DepreciationHard
A machine costs €120 000, has a useful life of 10 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €120 000life = 10salvage = €6 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · Avoid overstating assets and income under uncertainty
Why this is the answer
Prudence means exercising caution so that assets and income are not overstated and liabilities and expenses not understated.
Answer
D · Avoid overstating assets and income under uncertainty
2.Financial accounting
Answer: C · Will continue to operate for the foreseeable future
Why this is the answer
Unless management intends or must liquidate, assets and liabilities are measured assuming continued operations; material doubts must be disclosed.
Answer
C · Will continue to operate for the foreseeable future
3.Depreciation
Answer: D = 1966 €
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: 0.2·24 000.00 = €4 800.00
year 2: 0.2·19 200.00 = €3 840.00
year 3: 0.2·15 360.00 = €3 072.00
year 4: 0.2·12 288.00 = €2 457.60
year 5: 0.2·9 830.40 = €1 966.08
Answer
D = €1 966.08
4.Depreciation
Answer: D = 14509 €
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
(10 − 4 + 1)/55 = 7/55
Depreciation
D = 114 000·7/55 = €14 509.09
Answer
D = €14 509.09
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