Answer:
Accumulated depreciation for Years 1 - 5 under:
- the Straight-line method is $90,000.
- the Units-of-production method is $90,000.
- the Double-declining-balance method is $86,170.
Explanation:
The total cost of the asset is $90,000 + $3,000 + $1,500 + $4,500 = $99,000, since all the other costs were directly attributable cost and were necessary to bring the asset to usable form.
- The painting is capitalized because it is the first time Trust Delivery would be using the asset, otherwise it would have been expended
- Overhauling cost can be regarded as a separate asset, if we were provided with different useful lives - componentization.
Under straight-line method, depreciation expense is (cost - residual value) / No of years = ($99,000 - $9,000) / 5 years = $18,000 yearly depreciation expense.
Accumulated depreciation for Years 1 to 5 is $18,000 x 5 years $90,000.
The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:
(Original Cost - Salvage value) / Estimated production capacity x Units/year
At Year 1, depreciation expense (DE) is: ($99,000 - $9,000) / 100,000 miles x 22,500 miles = $20,250/year
Accumulated depreciation for the first four years is $20,250 x 4 years = $81,000.
At Year 5, depreciation = $90,000 / 100,000 miles x 10,000 miles = $9,000
Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in Years 1 - 4.
Accumulated depreciation expense for Years 1 to 5, under this method, is $90,000 (addition of first four years and the Year 5).
The double-declining method is otherwise known as the reducing balance method and is given by the formula below:
Double declining method = 2 X SLDP X BV
SLDP = straight-line depreciation percentage
BV = Book value
SLDP is 100%/5years = 20%, then 20% multiplied by 2 to give 40%
At Year 1, 40% X $99,000 = $39,600
At Year 2, 40% X $59,400 ($99,000 - $39,600) = $23,760
At Year 3, 40% X $35,640 ($59,400 - $23,760) = $14,256
At Year 4, 40% X $21,384 ($35,640 - $14,256) = $8,554 approximately (the depreciation expense would stop at this stage since the amount falls below the residual value).
Accumulated depreciation expense for Years 1 to 4, under this method, is $86,170 (addition of all the yearly depreciation).
