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
Operating profit is €120,000 and interest expense is €30,000. What is interest cover?
- A0.25 times
- B90,000 times
- C3 times
- D4 times
2.Financial accountingHard
A company changes its inventory method from weighted average to FIFO because it gives more relevant information. Under IAS 8, how is this applied?
- AProspectively, from the date of the change only
- BRetrospectively, restating comparative figures as if FIFO had always been used
- CBy recognising the whole effect as income this year
- DIt is not allowed to change inventory methods
3.DepreciationMedium
A computer system costs €45 000, has a useful life of 10 years and a salvage value of €7 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €45 000life = 10salvage = €7 000year = 2
D = €
4.DepreciationHard
A computer system costs €80 000, has a useful life of 6 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 = €80 000life = 6salvage = €12 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · 4 times
Why this is the answer
€120,000 ÷ €30,000 = 4. The company earns its interest four times over; low cover signals a risk of not meeting interest payments.
Answer
D · 4 times
2.Financial accounting
Answer: B · Retrospectively, restating comparative figures as if FIFO had always been used
Why this is the answer
Voluntary policy changes are applied retrospectively where practicable, so comparatives remain consistent. Changes in estimates, by contrast, are applied prospectively.
Answer
B · Retrospectively, restating comparative figures as if FIFO had always been used
3.Depreciation
Answer: D = 7200 €
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: 0.2·45 000.00 = €9 000.00
year 2: 0.2·36 000.00 = €7 200.00
Answer
D = €7 200.00
4.Depreciation
Answer: D = 16190 €
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 = 68 000·5/21 = €16 190.48
Answer
D = €16 190.48
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