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?
- A25%
- B10%
- C33%
- D75%
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?
- AConsolidate 100% of S line by line and show a non-controlling interest
- BShow one equity-method investment line for its 70% share of S
- CKeep the investment at cost and report only the dividends received from S
- DAdd only 70% of each of S's assets, liabilities, income and expenses
3.DepreciationMedium
A computer system costs €100 000, has a useful life of 5 years and a salvage value of €15 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €100 000life = 5salvage = €15 000year = 2
D = €
4.DepreciationHard
A computer system costs €50 000, has a useful life of 8 years and a salvage value of €10 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €50 000life = 8salvage = €10 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · 25%
Why this is the answer
Contribution = €10. C/S ratio = €10 ÷ €40 = 25%. Fixed costs ÷ C/S ratio gives break-even revenue.
Answer
A · 25%
2.Financial accounting
Answer: A · 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
A · Consolidate 100% of S line by line and show a non-controlling interest
3.Depreciation
Answer: D = 24000 €
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: 0.4·100 000.00 = €40 000.00
year 2: 0.4·60 000.00 = €24 000.00
Answer
D = €24 000.00
4.Depreciation
Answer: D = 5556 €
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
(8 − 4 + 1)/36 = 5/36
Depreciation
D = 40 000·5/36 = €5 555.56
Answer
D = €5 555.56
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