Answer:
(1) Straight-line.
Year 1 depreciation expense = $6,500
Year 2 depreciation expense = $6,500
(2) Double-declining-balance.
Year 1 depreciation expense = $16,000
Year 2 depreciation expense = $8,000
(3) Activity-based.
Year 1 depreciation expense = $7,000
Year 1 depreciation expense = $7,600
Explanation:
Note: This question is not complete. The complete question is therefore provided before answering the question as follows:
Speedy Delivery Company purchases a delivery van for $32,000. Speedy estimates that at the end of its four-year service life, the van will be worth $6,000. During the four-year period, the company expects to drive the van 130,000 miles. Actual miles driven each year were 35,000 miles in year 1 and 38,000 miles in year 2.
Required:
Calculate annual depreciation for the first two years of the van using each of the following methods.
(1) Straight-line.
(2) Double-declining-balance.
(3) Activity-based.
The explanation of the answers is now given as follows:
(1) Straight-line.
Depreciable amount = Cost of the delivery van – Salvage value = $32,000 - $6,000 = $26,000
Annual depreciation rate = 1 / Number of useful years = 1 / 4 = 0.25, or 25%
Year 1 depreciation expense = Depreciable amount * Annual depreciation rate = $26,000 * 25% = $6,500
Year 2 depreciation expense = Depreciable amount * Annual depreciation rate = $26,000 * 25% = $6,500
(2) Double-declining-balance.
Note: The salvage value is taken care of in the computation of the depreciation expense for the last useful year under the double-declining-balance method.
Therefore, we have:
Cost of the delivery van = $32,000
Annual depreciation rate = Straight line annual depreciation rate * 2 = 25% * 2 = 50%
Year 1 depreciation expense = Cost of the delivery van * Annual depreciation rate = $32,000 * 50% = $16,000
Book value at the end of year 1 = Cost of the delivery van - Year 1 depreciation expense = $36,000 - $16,000 = $16,000
Year 2 depreciation expense = Book value at the end of year 1 * Annual depreciation rate = $16,000 * 50% = $8,000
(3) Activity-based.
Depreciable amount = Cost of the delivery van – Salvage value = $32,000 - $6,000 = $26,000
Depreciation rate = Actual miles driven each year / Expected driven miles for four years ……….. (1)
Depreciation expense for each year = Depreciable amount * Depreciation rate …………… (2)
Using equations (2), we have:
Year 1 depreciation expense = $26,000 * (35,000 / 130,000) = $7,000
Year 1 depreciation expense = $26,000 * (38,000 / 130,000) = $7,600
