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
Current assets are €300,000 and current liabilities are €150,000. What is the current ratio?
- A4.5
- B1.5
- C0.5
- D2.0
2.Financial accountingHard
Under IFRS 16, a lessee typically recognises a lease on the balance sheet as:
- AEquity and a provision
- BRevenue and inventory
- CA right-of-use asset and a lease liability
- DAn operating expense only, spread evenly over the lease term
3.DepreciationMedium
A computer system costs €24 000, has a useful life of 5 years and a salvage value of €3 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €24 000life = 5salvage = €3 500year = 3
D = €
4.DepreciationHard
A delivery van costs €20 000, has a useful life of 4 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 = €20 000life = 4salvage = €3 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · 2.0
Why this is the answer
€300,000 ÷ €150,000 = 2.0, so current assets cover short-term obligations twice.
Answer
D · 2.0
2.Financial accounting
Answer: C · A right-of-use asset and a lease liability
Why this is the answer
IFRS 16 removed the operating lease distinction for lessees: they recognise a right-of-use asset and a liability for lease payments, except for short-term and low-value leases.
Answer
C · A right-of-use asset and a lease liability
3.Depreciation
Answer: D = 3456 €
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: 0.4·24 000.00 = €9 600.00
year 2: 0.4·14 400.00 = €5 760.00
year 3: 0.4·8 640.00 = €3 456.00
Answer
D = €3 456.00
4.Depreciation
Answer: D = 5100 €
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
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 17 000·3/10 = €5 100.00
Answer
D = €5 100.00
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