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
Cost of sales is €600,000 and average inventory is €100,000. What is the inventory turnover?
- A16 times a year
- B60 times a year
- C0.17 times a year
- D6 times a year
2.Financial accountingHard
Goodwill arises in a business combination when:
- AThe consideration paid exceeds the fair value of identifiable net assets acquired
- BThe acquired company makes a loss
- CAssets are revalued upwards
- DA company has a good reputation
3.DepreciationMedium
A delivery van costs €60 000, has a useful life of 5 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 3.
cost = €60 000life = 5salvage = €6 000year = 3
D = €
4.DepreciationHard
A delivery van costs €30 000, has a useful life of 5 years and a salvage value of €1 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €30 000life = 5salvage = €1 500year = 3
D = €
3Solutions
1.Financial accounting
Answer: D · 6 times a year
Why this is the answer
€600,000 ÷ €100,000 = 6, so inventory is replaced about every 61 days (365 ÷ 6).
Answer
D · 6 times a year
2.Financial accounting
Answer: A · The consideration paid exceeds the fair value of identifiable net assets acquired
Why this is the answer
Goodwill = consideration − fair value of identifiable net assets. Under IFRS it is not amortised but tested for impairment annually.
Answer
A · The consideration paid exceeds the fair value of identifiable net assets acquired
3.Depreciation
Answer: D = 8640 €
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: 0.4·60 000.00 = €24 000.00
year 2: 0.4·36 000.00 = €14 400.00
year 3: 0.4·21 600.00 = €8 640.00
Answer
D = €8 640.00
4.Depreciation
Answer: D = 5700 €
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
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 28 500·3/15 = €5 700.00
Answer
D = €5 700.00
ExamProblems · examproblems.com/courses/financial-accounting