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 machine costs €10,000 and is depreciated at 20% a year on the reducing balance. What is the depreciation charge in year 2?
- A€1,600
- B€1,800
- C€2,000
- D€4,000
2.Financial accountingHard
Under the matching principle, the cost of a product warranty sold with goods this year should be:
- ARecorded as revenue
- BIgnored until the warranty expires
- CEstimated and recognised as an expense in the year of sale
- DRecognised only when a customer actually makes a warranty claim
3.DepreciationMedium
A production line costs €30 000, has a useful life of 8 years and a salvage value of €6 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €30 000life = 8salvage = €6 000year = 2
D = €
4.DepreciationHard
A computer system costs €80 000, has a useful life of 4 years and a salvage value of €8 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €80 000life = 4salvage = €8 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · €1,600
Why this is the answer
Year 1: 20% × €10,000 = €2,000, leaving €8,000. Year 2: 20% × €8,000 = €1,600. Reducing balance charges less each year.
Answer
A · €1,600
2.Financial accounting
Answer: C · Estimated and recognised as an expense in the year of sale
Why this is the answer
A provision for expected warranty costs is recognised when the goods are sold, matching the expense with the related revenue (IAS 37).
Answer
C · Estimated and recognised as an expense in the year of sale
3.Depreciation
Answer: D = 5625 €
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
2/8 = 0.25
Year by year
year 1: 0.25·30 000.00 = €7 500.00
year 2: 0.25·22 500.00 = €5 625.00
Answer
D = €5 625.00
4.Depreciation
Answer: D = 21600 €
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 = 72 000·3/10 = €21 600.00
Answer
D = €21 600.00
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