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
Trade receivables are €50,000 and annual credit sales are €365,000. What are the receivable days?
- A73 days
- B7.3 days
- C36.5 days
- D50 days
2.Financial accountingHard
The standard is 2 labour hours per unit at €20 an hour. 500 units are made in 1,100 hours. What is the labour efficiency variance?
- A€22,000 adverse
- B€2,000 favourable
- C€2,000 adverse
- D€1,000 adverse
3.DepreciationMedium
A machine costs €45 000, has a useful life of 4 years and a salvage value of €4 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €45 000life = 4salvage = €4 500year = 2
D = €
4.DepreciationHard
A machine costs €100 000, has a useful life of 8 years and a salvage value of €20 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 6.
cost = €100 000life = 8salvage = €20 000year = 6
D = €
3Solutions
1.Financial accounting
Answer: D · 50 days
Why this is the answer
€50,000 ÷ €365,000 × 365 = 50 days. This is the average time customers take to pay.
Answer
D · 50 days
2.Financial accounting
Answer: C · €2,000 adverse
Why this is the answer
Standard hours = 500 × 2 = 1,000. Extra 100 hours × €20 = €2,000 adverse, because more hours were used than the standard allows.
Answer
C · €2,000 adverse
3.Depreciation
Answer: D = 11250 €
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
2/4 = 0.5
Year by year
year 1: 0.5·45 000.00 = €22 500.00
year 2: 0.5·22 500.00 = €11 250.00
Answer
D = €11 250.00
4.Depreciation
Answer: D = 6667 €
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 6
(8 − 6 + 1)/36 = 3/36
Depreciation
D = 80 000·3/36 = €6 666.67
Answer
D = €6 666.67
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