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
Which ratio measures a company's ability to pay its short-term obligations?
- AReturn on equity
- BEarnings per share
- CThe gross margin
- DThe current ratio
2.Financial accountingHard
A company records routine repair costs as additions to non-current assets instead of expenses. What is the effect this year?
- AOnly cash is affected
- BProfit and assets are overstated
- CProfit and assets are understated
- DProfit is understated and assets are overstated
3.DepreciationMedium
A delivery van costs €45 000, has a useful life of 10 years and a salvage value of €9 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 6.
cost = €45 000life = 10salvage = €9 000year = 6
D = €
4.DepreciationHard
A production line costs €20 000, has a useful life of 10 years and a salvage value of €3 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €20 000life = 10salvage = €3 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: D · The current ratio
Why this is the answer
The current ratio (current assets/current liabilities) indicates liquidity; a value below 1 can signal problems paying short-term debts.
Answer
D · The current ratio
2.Financial accounting
Answer: B · Profit and assets are overstated
Why this is the answer
Capitalising expenses moves cost out of profit into assets, so both are overstated now. Later depreciation spreads the cost over future years.
Answer
B · Profit and assets are overstated
3.Depreciation
Answer: D = 2949 €
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: 0.2·45 000.00 = €9 000.00
year 2: 0.2·36 000.00 = €7 200.00
year 3: 0.2·28 800.00 = €5 760.00
year 4: 0.2·23 040.00 = €4 608.00
year 5: 0.2·18 432.00 = €3 686.40
year 6: 0.2·14 745.60 = €2 949.12
Answer
D = €2 949.12
4.Depreciation
Answer: D = 2473 €
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 3
(10 − 3 + 1)/55 = 8/55
Depreciation
D = 17 000·8/55 = €2 472.73
Answer
D = €2 472.73
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