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 company increases its allowance for doubtful receivables. What is the effect?
- ACash decreases immediately
- BOnly the notes change; no figures move
- CAn expense is recognised and net receivables fall
- DRevenue increases and gross receivables rise by the same amount
2.Financial accountingHard
After the year end, but before the accounts are approved, a customer who owed money at year end goes bankrupt. Under IAS 10 this is:
- AA change in accounting policy
- BIgnored, because it happened after the year end
- CAn adjusting event, so receivables are reduced
- DA non-adjusting event, disclosed only
3.DepreciationMedium
A delivery van costs €100 000, has a useful life of 6 years and a salvage value of €10 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €100 000life = 6salvage = €10 000year = 4
D = €
4.DepreciationHard
A machine costs €24 000, has a useful life of 4 years and a salvage value of €5 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €24 000life = 4salvage = €5 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · An expense is recognised and net receivables fall
Why this is the answer
The increase is charged to profit, and the allowance is deducted from gross receivables, so the balance sheet shows the amount expected to be collected.
Answer
C · An expense is recognised and net receivables fall
2.Financial accounting
Answer: C · An adjusting event, so receivables are reduced
Why this is the answer
The customer's inability to pay existed at year end, so the accounts are adjusted. A fire after year end would be non-adjusting, because it is a new condition.
Answer
C · An adjusting event, so receivables are reduced
3.Depreciation
Answer: D = 9877 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·100 000.00 = €33 333.33
year 2: 0.3333·66 666.67 = €22 222.22
year 3: 0.3333·44 444.44 = €14 814.81
year 4: 0.3333·29 629.63 = €9 876.54
Answer
D = €9 876.54
4.Depreciation
Answer: D = 5700 €
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
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 19 000·3/10 = €5 700.00
Answer
D = €5 700.00
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