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
Fixed costs are €20,000, the selling price is €50 and the variable cost is €30 per unit. What is the break-even point?
- A1,000 units
- B2,000 units
- C400 units
- D667 units
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 €100 000, has a useful life of 5 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €100 000life = 5salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €80 000, has a useful life of 8 years and a salvage value of €4 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €80 000life = 8salvage = €4 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · 1,000 units
Why this is the answer
Contribution per unit = €50 − €30 = €20. Break-even = €20,000 ÷ €20 = 1,000 units.
Answer
A · 1,000 units
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 = 24000 €
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: 0.4·100 000.00 = €40 000.00
year 2: 0.4·60 000.00 = €24 000.00
Answer
D = €24 000.00
4.Depreciation
Answer: D = 10556 €
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 4
(8 − 4 + 1)/36 = 5/36
Depreciation
D = 76 000·5/36 = €10 555.56
Answer
D = €10 555.56
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