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 machine costs €10,000 and is depreciated at 20% a year on the reducing balance. What is the depreciation charge in year 2?
- A€2,000
- B€4,000
- C€1,800
- D€1,600
2.Financial accountingHard
An increase in accounts receivable during the year, in the indirect cash flow method, is:
- AAdded to profit
- BShown as an investing outflow
- CNot relevant to cash flow
- DSubtracted from profit to get operating cash flow
3.DepreciationMedium
A production line costs €45 000, has a useful life of 4 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €45 000life = 4salvage = €2 500year = 2
D = €
4.DepreciationHard
A delivery van costs €80 000, has a useful life of 6 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €80 000life = 6salvage = €12 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: D · €1,600
Why this is the answer
Year 1: 20% × €10,000 = €2,000, leaving €8,000. Year 2: 20% × €8,000 = €1,600. Reducing balance charges less each year.
Answer
D · €1,600
2.Financial accounting
Answer: D · Subtracted from profit to get operating cash flow
Why this is the answer
Higher receivables mean some revenue was not received in cash, so the increase is deducted.
Answer
D · Subtracted from profit to get operating cash flow
3.Depreciation
Answer: D = 11250 €
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: 0.5·45 000.00 = €22 500.00
year 2: 0.5·22 500.00 = €11 250.00
Answer
D = €11 250.00
4.Depreciation
Answer: D = 12952 €
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 3
(6 − 3 + 1)/21 = 4/21
Depreciation
D = 68 000·4/21 = €12 952.38
Answer
D = €12 952.38
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