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 company pays its insurance for next year in advance. How is the payment recorded at the year end?
- AAs a prepaid expense (asset)
- BAs an expense of the current year in full
- CAs a liability
- DAs revenue
2.Financial accountingHard
Production exceeds sales this period, so inventory rises. How does absorption costing profit compare with marginal costing profit?
- AThey are always equal
- BAbsorption costing profit is higher
- CAbsorption costing shows a loss
- DMarginal costing profit is higher this period
3.DepreciationMedium
A machine costs €45 000, has a useful life of 5 years and a salvage value of €7 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 3.
cost = €45 000life = 5salvage = €7 000year = 3
D = €
4.DepreciationHard
A production line costs €80 000, has a useful life of 5 years and a salvage value of €12 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €80 000life = 5salvage = €12 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · As a prepaid expense (asset)
Why this is the answer
The unused part of the payment is an asset (prepayment) and becomes an expense in the period it covers.
Answer
A · As a prepaid expense (asset)
2.Financial accounting
Answer: B · Absorption costing profit is higher
Why this is the answer
Under absorption costing part of this period's fixed overhead sits in closing inventory instead of being expensed, so reported profit is higher when inventory rises.
Answer
B · Absorption costing profit is higher
3.Depreciation
Answer: D = 6480 €
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
2/5 = 0.4
Year by year
year 1: 0.4·45 000.00 = €18 000.00
year 2: 0.4·27 000.00 = €10 800.00
year 3: 0.4·16 200.00 = €6 480.00
Answer
D = €6 480.00
4.Depreciation
Answer: D = 18133 €
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
(5 − 2 + 1)/15 = 4/15
Depreciation
D = 68 000·4/15 = €18 133.33
Answer
D = €18 133.33
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