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
Which depreciation method charges the same amount every year?
- ASum-of-the-years'-digits
- BStraight-line
- CUnits of production
- DReducing balance
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?
- ANothing, because each company is a separate entity
- BThe profit is shown twice, once for each company
- CThe unrealised profit in inventory is eliminated
- DThe sale is shown as external revenue of the group
3.DepreciationMedium
A machine costs €12 000, has a useful life of 6 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 4.
cost = €12 000life = 6salvage = €0year = 4
D = €
4.DepreciationHard
A machine costs €45 000, has a useful life of 10 years and a salvage value of €7 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €45 000life = 10salvage = €7 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: B · Straight-line
Why this is the answer
Straight-line spreads the depreciable amount evenly. Reducing balance charges more in early years; units of production follows actual use.
Answer
B · Straight-line
2.Financial accounting
Answer: C · 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
C · The unrealised profit in inventory is eliminated
3.Depreciation
Answer: D = 1185 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·12 000.00 = €4 000.00
year 2: 0.3333·8 000.00 = €2 666.67
year 3: 0.3333·5 333.33 = €1 777.78
year 4: 0.3333·3 555.56 = €1 185.19
Answer
D = €1 185.19
4.Depreciation
Answer: D = 4836 €
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
(10 − 4 + 1)/55 = 7/55
Depreciation
D = 38 000·7/55 = €4 836.36
Answer
D = €4 836.36
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