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?
- A4 times
- B0.25 times
- C90,000 times
- D3 times
2.Financial accountingHard
The going concern assumption means financial statements are prepared assuming the entity:
- AWill be sold within one year
- BHas no debts
- CWill continue to operate for the foreseeable future
- DWill make a profit every year
3.DepreciationMedium
A delivery van costs €12 000, has a useful life of 10 years and a salvage value of €2 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 8.
cost = €12 000life = 10salvage = €2 000year = 8
D = €
4.DepreciationHard
A computer system costs €12 000, has a useful life of 5 years and a salvage value of €2 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €12 000life = 5salvage = €2 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · 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
A · 4 times
2.Financial accounting
Answer: C · Will continue to operate for the foreseeable future
Why this is the answer
Unless management intends or must liquidate, assets and liabilities are measured assuming continued operations; material doubts must be disclosed.
Answer
C · Will continue to operate for the foreseeable future
3.Depreciation
Answer: D = 503.3 €
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: 0.2·12 000.00 = €2 400.00
year 2: 0.2·9 600.00 = €1 920.00
year 3: 0.2·7 680.00 = €1 536.00
year 4: 0.2·6 144.00 = €1 228.80
year 5: 0.2·4 915.20 = €983.04
year 6: 0.2·3 932.16 = €786.43
year 7: 0.2·3 145.73 = €629.15
year 8: 0.2·2 516.58 = €503.32
Answer
D = €503.32
4.Depreciation
Answer: D = 2667 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 10 000·4/15 = €2 666.67
Answer
D = €2 666.67
ExamProblems · examproblems.com/courses/financial-accounting