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
Budgeted sales are 1,500 units and the break-even point is 1,000 units. What is the margin of safety?
- A500 units
- B1,000 units
- C1,500 units
- D2,500 units
2.Financial accountingHard
Under IFRS 15, revenue is recognised:
- AWhen the contract is signed
- BAt the end of the financial year
- COnly when cash is received
- DWhen (or as) the entity satisfies a performance obligation by transferring control to the customer
3.DepreciationMedium
A machine costs €80 000, has a useful life of 10 years and a salvage value of €4 000. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 6.
cost = €80 000life = 10salvage = €4 000year = 6
D = €
4.DepreciationHard
A computer system costs €12 000, has a useful life of 5 years and a salvage value of €0. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 2.
cost = €12 000life = 5salvage = €0year = 2
D = €
3Solutions
1.Financial accounting
Answer: A · 500 units
Why this is the answer
Margin of safety = budgeted sales − break-even sales = 500 units, or one third of budgeted sales.
Answer
A · 500 units
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 = 5243 €
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: 0.2·80 000.00 = €16 000.00
year 2: 0.2·64 000.00 = €12 800.00
year 3: 0.2·51 200.00 = €10 240.00
year 4: 0.2·40 960.00 = €8 192.00
year 5: 0.2·32 768.00 = €6 553.60
year 6: 0.2·26 214.40 = €5 242.88
Answer
D = €5 242.88
4.Depreciation
Answer: D = 3200 €
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 = 12 000·4/15 = €3 200.00
Answer
D = €3 200.00
ExamProblems · examproblems.com/courses/financial-accounting