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 project costs €100,000 and brings in €25,000 cash per year. What is its payback period?
- A4 years
- B25 years
- C5 years
- D2.5 years
2.Financial accountingHard
The standard price of material is €5 per kg. The company buys 1,000 kg for €5,400. What is the material price variance?
- A€400 favourable
- B€5,400 adverse
- C€0.40 adverse
- D€400 adverse
3.DepreciationMedium
A machine costs €120 000, has a useful life of 4 years and a salvage value of €6 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €120 000life = 4salvage = €6 000year = 2
D = €
4.DepreciationHard
A machine costs €60 000, has a useful life of 10 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 7.
cost = €60 000life = 10salvage = €0year = 7
D = €
3Solutions
1.Financial accounting
Answer: A · 4 years
Why this is the answer
€100,000 ÷ €25,000 = 4 years. Payback is simple but ignores the time value of money and cash flows after payback.
Answer
A · 4 years
2.Financial accounting
Answer: D · €400 adverse
Why this is the answer
Standard cost of 1,000 kg = €5,000; actual cost = €5,400. Paying more than standard gives a €400 adverse price variance.
Answer
D · €400 adverse
3.Depreciation
Answer: D = 30000 €
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: 0.5·120 000.00 = €60 000.00
year 2: 0.5·60 000.00 = €30 000.00
Answer
D = €30 000.00
4.Depreciation
Answer: D = 4364 €
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 7
(10 − 7 + 1)/55 = 4/55
Depreciation
D = 60 000·4/55 = €4 363.64
Answer
D = €4 363.64
ExamProblems · examproblems.com/courses/financial-accounting