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 with a carrying amount of €3,000 is sold for €4,000. What is recorded in the income statement?
- AA loss on disposal of €1,000
- BA gain on disposal of €4,000
- CRevenue of €4,000
- DA gain on disposal of €1,000
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€5,400 adverse
- B€0.40 adverse
- C€400 favourable
- D€400 adverse
3.DepreciationMedium
A computer system 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 production line costs €20 000, has a useful life of 10 years and a salvage value of €4 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 8.
cost = €20 000life = 10salvage = €4 000year = 8
D = €
3Solutions
1.Financial accounting
Answer: D · A gain on disposal of €1,000
Why this is the answer
Gain or loss on disposal = proceeds − carrying amount = €4,000 − €3,000 = €1,000 gain. It is not part of normal revenue.
Answer
D · A gain on disposal of €1,000
2.Financial accounting
Answer: D · €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
D · €400 adverse
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 = 872.7 €
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 = 16 000·3/55 = €872.73
Answer
D = €872.73
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