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 increases its allowance for doubtful receivables. What is the effect?
- ARevenue increases and gross receivables rise by the same amount
- BAn expense is recognised and net receivables fall
- COnly the notes change; no figures move
- DCash decreases immediately
2.Financial accountingHard
An asset is impaired when its carrying amount is higher than its:
- AOriginal purchase price
- BDepreciation charge
- CResidual value only
- DRecoverable amount (the higher of fair value less costs of disposal and value in use)
3.DepreciationMedium
A computer system costs €45 000, has a useful life of 6 years and a salvage value of €9 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 4.
cost = €45 000life = 6salvage = €9 000year = 4
D = €
4.DepreciationHard
A computer system costs €45 000, has a useful life of 8 years and a salvage value of €7 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €45 000life = 8salvage = €7 000year = 5
D = €
3Solutions
1.Financial accounting
Answer: B · An expense is recognised and net receivables fall
Why this is the answer
The increase is charged to profit, and the allowance is deducted from gross receivables, so the balance sheet shows the amount expected to be collected.
Answer
B · An expense is recognised and net receivables fall
2.Financial accounting
Answer: D · Recoverable amount (the higher of fair value less costs of disposal and value in use)
Why this is the answer
If the carrying amount exceeds the recoverable amount, the difference is written off as an impairment loss.
Answer
D · Recoverable amount (the higher of fair value less costs of disposal and value in use)
3.Depreciation
Answer: D = 4333 €
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: 0.3333·45 000.00 = €15 000.00
year 2: 0.3333·30 000.00 = €10 000.00
year 3: 0.3333·20 000.00 = €6 666.67
year 4: 0.3333·13 333.33 = €4 333.33
Answer
D = €4 333.33
4.Depreciation
Answer: D = 4222 €
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
(8 − 5 + 1)/36 = 4/36
Depreciation
D = 38 000·4/36 = €4 222.22
Answer
D = €4 222.22
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