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
At 31 December, electricity used in December (€800) has not yet been billed. Which year-end entry is correct?
- ADebit prepayments, credit cash
- BDebit electricity expense, credit accruals
- CNo entry until the bill arrives
- DDebit accruals, credit electricity expense
2.Financial accountingHard
The standard is 2 labour hours per unit at €20 an hour. 500 units are made in 1,100 hours. What is the labour efficiency variance?
- A€1,000 adverse
- B€22,000 adverse
- C€2,000 adverse
- D€2,000 favourable
3.DepreciationMedium
A machine costs €50 000, has a useful life of 5 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 2.
cost = €50 000life = 5salvage = €10 000year = 2
D = €
4.DepreciationHard
A delivery van costs €12 000, has a useful life of 8 years and a salvage value of €1 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €12 000life = 8salvage = €1 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · Debit electricity expense, credit accruals
Why this is the answer
The accrual records December's cost as an expense this year with a current liability, so expenses match the period of use.
Answer
B · Debit electricity expense, credit accruals
2.Financial accounting
Answer: C · €2,000 adverse
Why this is the answer
Standard hours = 500 × 2 = 1,000. Extra 100 hours × €20 = €2,000 adverse, because more hours were used than the standard allows.
Answer
C · €2,000 adverse
3.Depreciation
Answer: D = 12000 €
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: 0.4·50 000.00 = €20 000.00
year 2: 0.4·30 000.00 = €12 000.00
Answer
D = €12 000.00
4.Depreciation
Answer: D = 2139 €
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
(8 − 2 + 1)/36 = 7/36
Depreciation
D = 11 000·7/36 = €2 138.89
Answer
D = €2 138.89
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