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 project costs €100,000 and brings in €25,000 cash per year. What is its payback period?
- A25 years
- B5 years
- C4 years
- D2.5 years
2.Financial accountingHard
A company switches to a depreciation method that gives higher charges. Ignoring tax, what happens to cash flow?
- ACash flow rises by the extra depreciation
- BCash flow falls by the amount of the extra depreciation
- CCash flow and profit both rise
- DCash flow is unchanged, although profit falls
3.DepreciationMedium
A production line costs €45 000, has a useful life of 6 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 = 6salvage = €4 500year = 2
D = €
4.DepreciationHard
A computer system costs €60 000, has a useful life of 10 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 7.
cost = €60 000life = 10salvage = €0year = 7
D = €
3Solutions
1.Financial accounting
Answer: C · 4 years
Why this is the answer
€100,000 ÷ €25,000 = 4 years. Payback is simple but ignores the time value of money and cash flows after payback.
Answer
C · 4 years
2.Financial accounting
Answer: D · Cash flow is unchanged, although profit falls
Why this is the answer
Depreciation allocates a cost already paid. Changing the method changes reported profit, but no extra cash leaves the business (tax effects aside).
Answer
D · Cash flow is unchanged, although profit falls
3.Depreciation
Answer: D = 10000 €
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
2/6 = 0.3333
Year by year
year 1: 0.3333·45 000.00 = €15 000.00
year 2: 0.3333·30 000.00 = €10 000.00
Answer
D = €10 000.00
4.Depreciation
Answer: D = 4364 €
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 7
(10 − 7 + 1)/55 = 4/55
Depreciation
D = 60 000·4/55 = €4 363.64
Answer
D = €4 363.64
ExamProblems · examproblems.com/courses/financial-accounting