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
The prudence (conservatism) concept suggests that accountants should:
- AAlways record the highest possible profit to attract investors
- BValue assets at their selling price
- CAvoid overstating assets and income under uncertainty
- DIgnore possible losses
2.Financial accountingHard
Machine hours are scarce. Product X earns €20 contribution and needs 4 hours; product Y earns €15 and needs 2 hours. Which should be made first?
- AEither, because the total contribution is the same
- BY, because it earns €7.50 per hour versus €5 for X
- CX, because it uses more machine time
- DX, because it earns more contribution per unit
3.DepreciationMedium
A delivery van costs €60 000, has a useful life of 10 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 8.
cost = €60 000life = 10salvage = €6 000year = 8
D = €
4.DepreciationHard
A delivery van costs €30 000, has a useful life of 5 years and a salvage value of €4 500. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €30 000life = 5salvage = €4 500year = 2
D = €
3Solutions
1.Financial accounting
Answer: C · Avoid overstating assets and income under uncertainty
Why this is the answer
Prudence means exercising caution so that assets and income are not overstated and liabilities and expenses not understated.
Answer
C · Avoid overstating assets and income under uncertainty
2.Financial accounting
Answer: B · Y, because it earns €7.50 per hour versus €5 for X
Why this is the answer
X earns €20 ÷ 4 = €5 per hour, Y earns €15 ÷ 2 = €7.50 per hour. With a scarce resource, maximise contribution per scarce hour.
Answer
B · Y, because it earns €7.50 per hour versus €5 for X
3.Depreciation
Answer: D = 2517 €
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
2/10 = 0.2
Year by year
year 1: 0.2·60 000.00 = €12 000.00
year 2: 0.2·48 000.00 = €9 600.00
year 3: 0.2·38 400.00 = €7 680.00
year 4: 0.2·30 720.00 = €6 144.00
year 5: 0.2·24 576.00 = €4 915.20
year 6: 0.2·19 660.80 = €3 932.16
year 7: 0.2·15 728.64 = €3 145.73
year 8: 0.2·12 582.91 = €2 516.58
Answer
D = €2 516.58
4.Depreciation
Answer: D = 6800 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 25 500·4/15 = €6 800.00
Answer
D = €6 800.00
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