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
Fixed costs are €20,000, the selling price is €50 and the variable cost is €30 per unit. What is the break-even point?
- A667 units
- B400 units
- C2,000 units
- D1,000 units
2.Financial accountingHard
Machine hours are scarce. Product X earns €20 contribution and needs 4 hours; product Y earns €15 and needs 2 hours. Which should be made first?
- AX, because it uses more machine time
- BY, because it earns €7.50 per hour versus €5 for X
- CEither, because the total contribution is the same
- DX, because it earns more contribution per unit
3.DepreciationMedium
A delivery van costs €12 000, has a useful life of 6 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 = €12 000life = 6salvage = €0year = 2
D = €
4.DepreciationHard
A delivery van costs €45 000, 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 6.
cost = €45 000life = 10salvage = €0year = 6
D = €
3Solutions
1.Financial accounting
Answer: D · 1,000 units
Why this is the answer
Contribution per unit = €50 − €30 = €20. Break-even = €20,000 ÷ €20 = 1,000 units.
Answer
D · 1,000 units
2.Financial accounting
Answer: B · Y, because it earns €7.50 per hour versus €5 for X
Why this is the answer
X earns €20 ÷ 4 = €5 per hour, Y earns €15 ÷ 2 = €7.50 per hour. With a scarce resource, maximise contribution per scarce hour.
Answer
B · Y, because it earns €7.50 per hour versus €5 for X
3.Depreciation
Answer: D = 2667 €
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: 0.3333·12 000.00 = €4 000.00
year 2: 0.3333·8 000.00 = €2 666.67
Answer
D = €2 666.67
4.Depreciation
Answer: D = 4091 €
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 6
(10 − 6 + 1)/55 = 5/55
Depreciation
D = 45 000·5/55 = €4 090.91
Answer
D = €4 090.91
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