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
On 1 October a company pays €12,000 rent for the next 12 months. Its year ends on 31 December. What is the rent expense for this year?
- A€12,000
- B€3,000
- C€9,000
- D€1,000
2.Financial accountingHard
The going concern assumption means financial statements are prepared assuming the entity:
- AWill be sold within one year
- BHas no debts
- CWill make a profit every year
- DWill continue to operate for the foreseeable future
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 machine costs €50 000, has a useful life of 4 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €50 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: B · €3,000
Why this is the answer
October to December is 3 months: 3/12 × €12,000 = €3,000. The remaining €9,000 is a prepayment (asset) at year end.
Answer
B · €3,000
2.Financial accounting
Answer: D · Will continue to operate for the foreseeable future
Why this is the answer
Unless management intends or must liquidate, assets and liabilities are measured assuming continued operations; material doubts must be disclosed.
Answer
D · Will continue to operate for the foreseeable future
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 = 15000 €
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
(4 − 2 + 1)/10 = 3/10
Depreciation
D = 50 000·3/10 = €15 000.00
Answer
D = €15 000.00
ExamProblems · examproblems.com/courses/financial-accounting