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
Revenue is €200,000 and cost of sales is €140,000. What is the gross profit margin?
- A43%
- B30%
- C70%
- D60%
2.Financial accountingHard
A parent sold goods to its subsidiary at a profit, and the subsidiary still holds them at year end. What must happen on consolidation?
- AThe profit is shown twice, once for each company
- BThe unrealised profit in inventory is eliminated
- CNothing, because each company is a separate entity
- DThe sale is shown as external revenue of the group
3.DepreciationMedium
A machine costs €12 000, has a useful life of 10 years and a salvage value of €500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 8.
cost = €12 000life = 10salvage = €500year = 8
D = €
4.DepreciationHard
A machine costs €45 000, has a useful life of 6 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €45 000life = 6salvage = €0year = 3
D = €
3Solutions
1.Financial accounting
Answer: B · 30%
Why this is the answer
Gross profit = €60,000. Margin = €60,000 ÷ €200,000 = 30%.
Answer
B · 30%
2.Financial accounting
Answer: B · The unrealised profit in inventory is eliminated
Why this is the answer
Intra-group sales and purchases are cancelled, and profit on goods still held in the group is removed from inventory and group profit until sold outside.
Answer
B · The unrealised profit in inventory is eliminated
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 = 8571 €
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 = 45 000·4/21 = €8 571.43
Answer
D = €8 571.43
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