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 machine with a carrying amount of €3,000 is sold for €4,000. What is recorded in the income statement?
- AA loss on disposal of €1,000
- BA gain on disposal of €1,000
- CA gain on disposal of €4,000
- DRevenue of €4,000
2.Financial accountingHard
A company sells a software licence together with two years of support for one price. Under IFRS 15, how is revenue recognised?
- ARecognise the whole price at once when the customer signs the contract
- BAllocate the price using standalone selling prices; recognise the licence at delivery and support over two years
- CRecognise half the price in each year without splitting it by obligation
- DDefer the whole price and recognise it when the two years of support end
3.DepreciationMedium
A computer system costs €12 000, has a useful life of 4 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 2.
cost = €12 000life = 4salvage = €2 500year = 2
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 5 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €120 000life = 5salvage = €12 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · A gain on disposal of €1,000
Why this is the answer
Gain or loss on disposal = proceeds − carrying amount = €4,000 − €3,000 = €1,000 gain. It is not part of normal revenue.
Answer
B · A gain on disposal of €1,000
2.Financial accounting
Answer: B · Allocate the price using standalone selling prices; recognise the licence at delivery and support over two years
Why this is the answer
The licence and support are distinct obligations. The price is split by relative standalone selling prices, and each part is recognised when or as that obligation is satisfied.
Answer
B · Allocate the price using standalone selling prices; recognise the licence at delivery and support over two years
3.Depreciation
Answer: D = 3000 €
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
2/4 = 0.5
Year by year
year 1: 0.5·12 000.00 = €6 000.00
year 2: 0.5·6 000.00 = €3 000.00
Answer
D = €3 000.00
4.Depreciation
Answer: D = 28800 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 108 000·4/15 = €28 800.00
Answer
D = €28 800.00
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