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
Fixed costs are €20,000, the selling price is €50 and the variable cost is €30 per unit. What is the break-even point?
- A1,000 units
- B2,000 units
- C667 units
- D400 units
2.Financial accountingHard
A company's debt-to-equity ratio rises sharply. What does this usually indicate?
- AHigher profitability
- BThat shareholders invested more money
- CHigher financial risk because the company relies more on borrowed money
- DBetter liquidity in the short term
3.DepreciationMedium
A computer system costs €30 000, has a useful life of 4 years and a salvage value of €1 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 4salvage = €1 500year = 2
D = €
4.DepreciationHard
A delivery van costs €120 000, has a useful life of 8 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €120 000life = 8salvage = €6 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: A · 1,000 units
Why this is the answer
Contribution per unit = €50 − €30 = €20. Break-even = €20,000 ÷ €20 = 1,000 units.
Answer
A · 1,000 units
2.Financial accounting
Answer: C · Higher financial risk because the company relies more on borrowed money
Why this is the answer
A higher ratio means more leverage: interest and repayments must be met whatever the results, so financial risk rises, although returns to shareholders may also rise.
Answer
C · Higher financial risk because the company relies more on borrowed money
3.Depreciation
Answer: D = 7500 €
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: 0.5·30 000.00 = €15 000.00
year 2: 0.5·15 000.00 = €7 500.00
Answer
D = €7 500.00
4.Depreciation
Answer: D = 9500 €
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 = 114 000·3/36 = €9 500.00
Answer
D = €9 500.00
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