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
A company finds that a machine will last 8 years instead of the 5 originally estimated. Under IAS 8, how is this change applied?
- AProspectively, by spreading the remaining carrying amount over the new remaining life
- BBy changing the original cost of the machine
- CRetrospectively, by restating all prior years
- DBy recognising a large gain in the current year
2.Financial accountingHard
A company issues shares at €5 each with a nominal value of €1. The extra €4 per share is recorded as:
- ARetained earnings
- BA liability
- CRevenue
- DShare premium
3.DepreciationMedium
A computer system costs €120 000, has a useful life of 10 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 5.
cost = €120 000life = 10salvage = €0year = 5
D = €
4.DepreciationHard
A machine costs €120 000, has a useful life of 8 years and a salvage value of €18 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €120 000life = 8salvage = €18 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: A · Prospectively, by spreading the remaining carrying amount over the new remaining life
Why this is the answer
Changes in estimates affect the current and future periods only. Prior-period restatement is for changes in policy and corrections of errors.
Answer
A · Prospectively, by spreading the remaining carrying amount over the new remaining life
2.Financial accounting
Answer: D · Share premium
Why this is the answer
The amount above nominal value goes to the share premium account in equity; issuing shares is a financing transaction, not income.
Answer
D · Share premium
3.Depreciation
Answer: D = 9830 €
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: 0.2·120 000.00 = €24 000.00
year 2: 0.2·96 000.00 = €19 200.00
year 3: 0.2·76 800.00 = €15 360.00
year 4: 0.2·61 440.00 = €12 288.00
year 5: 0.2·49 152.00 = €9 830.40
Answer
D = €9 830.40
4.Depreciation
Answer: D = 8500 €
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 6
(8 − 6 + 1)/36 = 3/36
Depreciation
D = 102 000·3/36 = €8 500.00
Answer
D = €8 500.00
ExamProblems · examproblems.com/courses/financial-accounting