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 increases its allowance for doubtful receivables. What is the effect?
- ACash decreases immediately
- BOnly the notes change; no figures move
- CRevenue increases and gross receivables rise by the same amount
- DAn expense is recognised and net receivables fall
2.Financial accountingHard
A parent sold goods to its subsidiary at a profit, and the subsidiary still holds them at year end. What must happen on consolidation?
- ANothing, because each company is a separate entity
- BThe sale is shown as external revenue of the group
- CThe unrealised profit in inventory is eliminated
- DThe profit is shown twice, once for each company
3.DepreciationMedium
A computer system costs €120 000, has a useful life of 5 years and a salvage value of €18 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €120 000life = 5salvage = €18 000year = 2
D = €
4.DepreciationHard
A delivery van costs €60 000, has a useful life of 6 years and a salvage value of €9 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €60 000life = 6salvage = €9 000year = 2
D = €
3Solutions
1.Financial accounting
Answer: D · An expense is recognised and net receivables fall
Why this is the answer
The increase is charged to profit, and the allowance is deducted from gross receivables, so the balance sheet shows the amount expected to be collected.
Answer
D · An expense is recognised and net receivables fall
2.Financial accounting
Answer: C · The unrealised profit in inventory is eliminated
Why this is the answer
Intra-group sales and purchases are cancelled, and profit on goods still held in the group is removed from inventory and group profit until sold outside.
Answer
C · The unrealised profit in inventory is eliminated
3.Depreciation
Answer: D = 28800 €
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: 0.4·120 000.00 = €48 000.00
year 2: 0.4·72 000.00 = €28 800.00
Answer
D = €28 800.00
4.Depreciation
Answer: D = 12143 €
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
(6 − 2 + 1)/21 = 5/21
Depreciation
D = 51 000·5/21 = €12 142.86
Answer
D = €12 142.86
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