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 inventory valuation method assumes the oldest goods are sold first?
- ASpecific identification of each item
- BFIFO (first in, first out)
- CWeighted average cost
- DLIFO (last in, first out)
2.Financial accountingHard
The standard price of material is €5 per kg. The company buys 1,000 kg for €5,400. What is the material price variance?
- A€400 adverse
- B€400 favourable
- C€5,400 adverse
- D€0.40 adverse
3.DepreciationMedium
A production line costs €50 000, has a useful life of 6 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €50 000life = 6salvage = €2 500year = 4
D = €
4.DepreciationHard
A production line costs €50 000, has a useful life of 10 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €50 000life = 10salvage = €0year = 5
D = €
3Solutions
1.Financial accounting
Answer: B · FIFO (first in, first out)
Why this is the answer
Under FIFO, cost of sales uses the oldest costs and closing inventory reflects recent costs. IFRS does not allow LIFO.
Answer
B · FIFO (first in, first out)
2.Financial accounting
Answer: A · €400 adverse
Why this is the answer
Standard cost of 1,000 kg = €5,000; actual cost = €5,400. Paying more than standard gives a €400 adverse price variance.
Answer
A · €400 adverse
3.Depreciation
Answer: D = 4938 €
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: 0.3333·50 000.00 = €16 666.67
year 2: 0.3333·33 333.33 = €11 111.11
year 3: 0.3333·22 222.22 = €7 407.41
year 4: 0.3333·14 814.81 = €4 938.27
Answer
D = €4 938.27
4.Depreciation
Answer: D = 5455 €
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 5
(10 − 5 + 1)/55 = 6/55
Depreciation
D = 50 000·6/55 = €5 454.55
Answer
D = €5 454.55
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