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 gain on disposal of €4,000
- BA loss on disposal of €1,000
- CRevenue of €4,000
- DA gain on disposal of €1,000
2.Financial accountingHard
Under IFRS 16, which lease may a lessee choose to expense on a straight-line basis instead of recognising a right-of-use asset?
- AA ten-year lease of a large production machine
- BAny lease of land and buildings
- CAny lease with monthly payments
- DA lease with a term of 12 months or less
3.DepreciationMedium
A production line costs €100 000, has a useful life of 8 years and a salvage value of €15 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €100 000life = 8salvage = €15 000year = 3
D = €
4.DepreciationHard
A production line costs €60 000, has a useful life of 8 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 5.
cost = €60 000life = 8salvage = €6 000year = 5
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 · A lease with a term of 12 months or less
Why this is the answer
Lessees may elect not to recognise short-term leases (12 months or less) and leases of low-value assets, expensing the payments instead.
Answer
D · A lease with a term of 12 months or less
3.Depreciation
Answer: D = 14063 €
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
2/8 = 0.25
Year by year
year 1: 0.25·100 000.00 = €25 000.00
year 2: 0.25·75 000.00 = €18 750.00
year 3: 0.25·56 250.00 = €14 062.50
Answer
D = €14 062.50
4.Depreciation
Answer: D = 6000 €
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 = 54 000·4/36 = €6 000.00
Answer
D = €6 000.00
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