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
Current assets are €300,000, including inventory of €100,000. Current liabilities are €200,000. What is the quick (acid-test) ratio?
- A0.5
- B1.5
- C2.0
- D1.0
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 half the price in each year without splitting it by obligation
- BRecognise the whole price at once when the customer signs the contract
- CDefer the whole price and recognise it when the two years of support end
- DAllocate the price using standalone selling prices; recognise the licence at delivery and support over two years
3.DepreciationMedium
A computer system costs €20 000, has a useful life of 5 years and a salvage value of €1 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €20 000life = 5salvage = €1 000year = 2
D = €
4.DepreciationHard
A computer system costs €20 000, has a useful life of 8 years and a salvage value of €4 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €20 000life = 8salvage = €4 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: D · 1.0
Why this is the answer
Quick ratio = (current assets − inventory) ÷ current liabilities = €200,000 ÷ €200,000 = 1.0. Inventory is excluded because it may be slow to turn into cash.
Answer
D · 1.0
2.Financial accounting
Answer: D · 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
D · Allocate the price using standalone selling prices; recognise the licence at delivery and support over two years
3.Depreciation
Answer: D = 4800 €
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: 0.4·20 000.00 = €8 000.00
year 2: 0.4·12 000.00 = €4 800.00
Answer
D = €4 800.00
4.Depreciation
Answer: D = 1333 €
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 6
(8 − 6 + 1)/36 = 3/36
Depreciation
D = 16 000·3/36 = €1 333.33
Answer
D = €1 333.33
ExamProblems · examproblems.com/courses/financial-accounting