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 costs €10,000 and is depreciated at 20% a year on the reducing balance. What is the depreciation charge in year 2?
- A€1,800
- B€2,000
- C€4,000
- D€1,600
2.Financial accountingHard
Tax rules allow faster depreciation of a machine than the company uses in its accounts. What arises under IAS 12?
- AA deferred tax liability
- BA refund of current tax paid
- CNo tax effect at all
- DA deferred tax asset
3.DepreciationMedium
A computer system costs €45 000, has a useful life of 10 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 8.
cost = €45 000life = 10salvage = €2 500year = 8
D = €
4.DepreciationHard
A computer system costs €80 000, 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 = €80 000life = 4salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · €1,600
Why this is the answer
Year 1: 20% × €10,000 = €2,000, leaving €8,000. Year 2: 20% × €8,000 = €1,600. Reducing balance charges less each year.
Answer
D · €1,600
2.Financial accounting
Answer: A · A deferred tax liability
Why this is the answer
The tax base falls faster than the carrying amount, creating a taxable temporary difference. The future extra tax is recognised now as a deferred tax liability.
Answer
A · A deferred tax liability
3.Depreciation
Answer: D = 1887 €
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
year 7: 0.2·11 796.48 = €2 359.30
year 8: 0.2·9 437.18 = €1 887.44
Answer
D = €1 887.44
4.Depreciation
Answer: D = 24000 €
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 = 80 000·3/10 = €24 000.00
Answer
D = €24 000.00
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