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€4,000
- B€1,600
- C€2,000
- D€1,800
2.Financial accountingHard
A firm has a net profit margin of 5%, asset turnover of 2 and an equity multiplier (assets ÷ equity) of 1.5. Using the DuPont analysis, what is ROE?
- A15%
- B10%
- C8.5%
- D7.5%
3.DepreciationMedium
A computer system costs €24 000, has a useful life of 6 years and a salvage value of €5 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €24 000life = 6salvage = €5 000year = 2
D = €
4.DepreciationHard
A production line costs €12 000, 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 8.
cost = €12 000life = 10salvage = €0year = 8
D = €
3Solutions
1.Financial accounting
Answer: B · €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
B · €1,600
2.Financial accounting
Answer: A · 15%
Why this is the answer
ROE = 5% × 2 × 1.5 = 15%. DuPont shows whether returns come from profitability, asset efficiency or leverage.
Answer
A · 15%
3.Depreciation
Answer: D = 5333 €
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: 0.3333·24 000.00 = €8 000.00
year 2: 0.3333·16 000.00 = €5 333.33
Answer
D = €5 333.33
4.Depreciation
Answer: D = 654.5 €
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 8
(10 − 8 + 1)/55 = 3/55
Depreciation
D = 12 000·3/55 = €654.55
Answer
D = €654.55
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