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?
- ANo entry until the bill arrives
- BDebit accruals, credit electricity expense
- CDebit prepayments, credit cash
- DDebit electricity expense, credit accruals
2.Financial accountingHard
A firm has a net profit margin of 5%, asset turnover of 2 and an equity multiplier (assets ÷ equity) of 1.5. Using the DuPont analysis, what is ROE?
- A15%
- B8.5%
- C10%
- D7.5%
3.DepreciationMedium
A delivery van costs €60 000, 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 = €60 000life = 4salvage = €6 000year = 2
D = €
4.DepreciationHard
A delivery van costs €60 000, has a useful life of 8 years and a salvage value of €3 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €60 000life = 8salvage = €3 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · 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
D · Debit electricity expense, credit accruals
2.Financial accounting
Answer: A · 15%
Why this is the answer
ROE = 5% × 2 × 1.5 = 15%. DuPont shows whether returns come from profitability, asset efficiency or leverage.
Answer
A · 15%
3.Depreciation
Answer: D = 15000 €
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: 0.5·60 000.00 = €30 000.00
year 2: 0.5·30 000.00 = €15 000.00
Answer
D = €15 000.00
4.Depreciation
Answer: D = 11083 €
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 = 57 000·7/36 = €11 083.33
Answer
D = €11 083.33
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