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 product sells for €40 and has a variable cost of €30. What is its contribution-to-sales (C/S) ratio?
- A75%
- B10%
- C33%
- D25%
2.Financial accountingHard
The standard is 2 labour hours per unit at €20 an hour. 500 units are made in 1,100 hours. What is the labour efficiency variance?
- A€2,000 favourable
- B€1,000 adverse
- C€22,000 adverse
- D€2,000 adverse
3.DepreciationMedium
A delivery van costs €20 000, has a useful life of 8 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 4.
cost = €20 000life = 8salvage = €4 000year = 4
D = €
4.DepreciationHard
A delivery van costs €60 000, 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 4.
cost = €60 000life = 10salvage = €0year = 4
D = €
3Solutions
1.Financial accounting
Answer: D · 25%
Why this is the answer
Contribution = €10. C/S ratio = €10 ÷ €40 = 25%. Fixed costs ÷ C/S ratio gives break-even revenue.
Answer
D · 25%
2.Financial accounting
Answer: D · €2,000 adverse
Why this is the answer
Standard hours = 500 × 2 = 1,000. Extra 100 hours × €20 = €2,000 adverse, because more hours were used than the standard allows.
Answer
D · €2,000 adverse
3.Depreciation
Answer: D = 2109 €
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
2/8 = 0.25
Year by year
year 1: 0.25·20 000.00 = €5 000.00
year 2: 0.25·15 000.00 = €3 750.00
year 3: 0.25·11 250.00 = €2 812.50
year 4: 0.25·8 437.50 = €2 109.38
Answer
D = €2 109.38
4.Depreciation
Answer: D = 7636 €
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
(10 − 4 + 1)/55 = 7/55
Depreciation
D = 60 000·7/55 = €7 636.36
Answer
D = €7 636.36
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