Question

Speedy Delivery Company purchases a delivery van for $43,200. Speedy estimates that at the end of its four-year service life, the van will be worth $6,800. During the four-year period, the company expects to drive the van 227,500 miles.Actual miles driven each year were 58,000 miles in year 1 and 62,000 miles in year 2.Required:Calculate annual depreciation for the first two years of the van using each of the following methods. (Do not round your intermediate calculations.)1. Straight-line.Year: Annual Depreciation122. Double-declining-balance.Year: Annual Depreciation12 3. Activity-based.Year: Annual Depreciation12

Answer 1

Answer:

1. Depreciation for year 1 on straight line method    $ 9,100

  Depreciation for year 2 on straight line method    $ 9,100

2. Depreciation for year 1 on double declining method    $ 20,200

  Depreciation for year 2 on double declining method     $ 11,,500

3. Depreciation for year 1 on activity based method    $ 9,280

  Depreciation for year 2 on activity based method    $ 9,920

Explanation:

Straight Life Depreciation

Cost of delivery van                            $ 43,200

Salvage Value at end of life              ($   6,800)

Depreciable value                              $ 36,400

Straight Line Depreciation  per year is calculated by dividing the depreciable value by the useful life:

$ 36.400/4  = $ 9,100. Since it is equal amounts over the useful life of the asset,the depreciation amount is same for year 1 and year 2

Double declining balance Depreciation

In a double declining balance method of depreciation, the depreciation rate in the first year is double percentage of Straight line  method, this does not consider salvage value. The percentage rate shall therefore be 100/4 *2 = 50 %    

Cost of delivery van                                                               $ 43,200

Straight Line depreciation based on 4 years life                 $ 10,100

Double the Straight Line method in first year          

so depreciation in year 1 is $ 10,100 * 2                                 $ 20,200

The depreciation base for year 2  shall be

Cost of delivery van                                                                 $ 43,200                                                                            

Depreciation for year 1                                                            $ 20,200

Depreciable base for year 2                                                   $ 23,000

Depreciation for year 2 @ 50 %                                              $ 11,500

Activity based Depreciation

Cost of delivery van                            $ 43,200

Salvage Value at end of life              ($   6,800)

Depreciable value                              $ 36,400

Expected usage 227,500 miles

Depreciation per mile is  227,500 miles / Depreciable Value $ 36,400  $ 0.16 per mile

Depreciation for year 1 on 58,000 miles is 58,000 * 0.16 = $ 9,280

Depreciation for year 2 on 62,000 miles is 62,000 * 0.16 = $ 9,920