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 is being sued. Its lawyers say losing is possible but not probable. How is this treated under IAS 37?
- ADisclosed as a contingent liability in the notes
- BRecognised as an expense and paid into a reserve
- CRecognised as a provision on the balance sheet
- DIgnored completely
2.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- ADepreciation must have been too high
- BThe company must have repaid all its loans
- CProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- DThe company has very high earnings quality
3.DepreciationMedium
A delivery van costs €45 000, has a useful life of 10 years and a salvage value of €2 500. Using the double-declining-balance method (without switching to straight-line), find the depreciation charge D in year 2.
cost = €45 000life = 10salvage = €2 500year = 2
D = €
4.DepreciationHard
A machine costs €120 000, has a useful life of 5 years and a salvage value of €6 000. Using the sum-of-the-years’-digits method, find the depreciation charge D in year 3.
cost = €120 000life = 5salvage = €6 000year = 3
D = €
3Solutions
1.Financial accounting
Answer: A · Disclosed as a contingent liability in the notes
Why this is the answer
A possible obligation is not recognised but disclosed, unless the chance of outflow is remote. A probable, measurable outflow would require a provision.
Answer
A · Disclosed as a contingent liability in the notes
2.Financial accounting
Answer: C · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
Why this is the answer
A widening gap between profit and operating cash flow often signals working capital build-up or aggressive recognition, suggesting low earnings quality.
Answer
C · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
3.Depreciation
Answer: D = 7200 €
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: 0.2·45 000.00 = €9 000.00
year 2: 0.2·36 000.00 = €7 200.00
Answer
D = €7 200.00
4.Depreciation
Answer: D = 22800 €
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 3
(5 − 3 + 1)/15 = 3/15
Depreciation
D = 114 000·3/15 = €22 800.00
Answer
D = €22 800.00
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