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
An asset costs €50,000, has a residual value of €5,000 and a useful life of 5 years. What is the annual straight-line depreciation?
- A€10,000
- B€9,000
- C€5,000
- D€11,000
2.Financial accountingHard
Company P buys 70% of the voting shares of S and gains control. How does P report S in its group accounts?
- AKeep the investment at cost and report only the dividends received from S
- BAdd only 70% of each of S's assets, liabilities, income and expenses
- CConsolidate 100% of S line by line and show a non-controlling interest
- DShow one equity-method investment line for its 70% share of S
3.DepreciationMedium
A computer system costs €12 000, has a useful life of 5 years and a salvage value of €2 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €12 000life = 5salvage = €2 000year = 3
D = €
4.DepreciationHard
A machine costs €50 000, has a useful life of 8 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €50 000life = 8salvage = €5 000year = 5
D = €
3Solutions
1.Financial accounting
Answer: B · €9,000
Why this is the answer
(Cost − residual value) ÷ useful life = (€50,000 − €5,000) ÷ 5 = €9,000 per year.
Answer
B · €9,000
2.Financial accounting
Answer: C · Consolidate 100% of S line by line and show a non-controlling interest
Why this is the answer
A subsidiary is consolidated line by line at 100%. The 30% owned by others is shown as a non-controlling interest within equity.
Answer
C · Consolidate 100% of S line by line and show a non-controlling interest
3.Depreciation
Answer: D = 1728 €
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
2/5 = 0.4
Year by year
year 1: 0.4·12 000.00 = €4 800.00
year 2: 0.4·7 200.00 = €2 880.00
year 3: 0.4·4 320.00 = €1 728.00
Answer
D = €1 728.00
4.Depreciation
Answer: D = 5000 €
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 5
(8 − 5 + 1)/36 = 4/36
Depreciation
D = 45 000·4/36 = €5 000.00
Answer
D = €5 000.00
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