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
Retained earnings represent:
- AAccumulated profits that have not been paid out as dividends
- BMoney owed to shareholders
- CThe share price
- DCash kept in the bank
2.Financial accountingHard
Under IFRS 15, revenue is recognised:
- AOnly when cash is received
- BAt the end of the financial year
- CWhen the contract is signed
- DWhen (or as) the entity satisfies a performance obligation by transferring control to the customer
3.DepreciationMedium
A production line costs €45 000, has a useful life of 4 years and a salvage value of €0. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €45 000life = 4salvage = €0year = 2
D = €
4.DepreciationHard
A computer system costs €120 000, has a useful life of 6 years and a salvage value of €18 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 4.
cost = €120 000life = 6salvage = €18 000year = 4
D = €
3Solutions
1.Financial accounting
Answer: A · Accumulated profits that have not been paid out as dividends
Why this is the answer
Retained earnings are cumulative net profits minus dividends; they are part of equity, not a pile of cash.
Answer
A · Accumulated profits that have not been paid out as dividends
2.Financial accounting
Answer: D · When (or as) the entity satisfies a performance obligation by transferring control to the customer
Why this is the answer
The steps: identify the contract, identify performance obligations, determine the price, allocate it, and recognise revenue as each obligation is satisfied.
Answer
D · When (or as) the entity satisfies a performance obligation by transferring control to the customer
3.Depreciation
Answer: D = 11250 €
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
2/4 = 0.5
Year by year
year 1: 0.5·45 000.00 = €22 500.00
year 2: 0.5·22 500.00 = €11 250.00
Answer
D = €11 250.00
4.Depreciation
Answer: D = 14571 €
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 4
(6 − 4 + 1)/21 = 3/21
Depreciation
D = 102 000·3/21 = €14 571.43
Answer
D = €14 571.43
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