Question

Kleener Co. acquired a new delivery truck at the beginning of its current fiscal year. The truck cost $52,000 and has an estimated useful life of four years and an estimated salvage value of $8,000.a. Calculate depreciation expense for each year of the truck’s life using1. Straight-line depreciation.2. Double-declining-balance depreciation.b. Calculate the truck’s net book value at the end of its third year of use under each depreciation method.c. Assume that Kleener Co. had no more use for the truck after the end of the third year and that at the beginning of the fourth year it had an offer from a buyer who was willing to pay $12,400 for the truck. Should the depreciation method used by Kleener Co. affect the decision to sell the truck?

Answer 1

Answer:

A.The Net Book Value after Year 3 in the straight line method will be $19,000

B. The Net Book Value after Year 3 in the double declining balance method will be $8,000

C.the depreciation method used will affect the decision of Kleener Co in accepting or rejecting the offer

Explanation:

Asset depreciation is the recognition of the declining value of an Asset over the period considered its useful life.

Without an upgrade it is unlikely an asset will deliver the same level of efficiency and generate as much output as the first Year of its operations, hence the need to recognize depreciation in the Income statement and reduce the Value of the Asset by the same in the Balance Sheet.

Straight line method of depreciation

It is Value of Asset less its salvage value divided by the estimated useful life of the Asset

= ($52,000 - $8,000)/4years

= $11,000 Annually (is the depreciation expense)

Year 1 expense = $11,000 leaving a Net book Value of (52,000 - 11,000) = $41,000

Year 2 expense = $11,000 leaving a Net book Value of (41,000 - 11,000) = $30,000

Year 3 expense = $11,000 leaving a Net book Value of (30,000 - 11,000) = $19,000

Double declining Balance depreciation

This is also called accelerated depreciation method because it depreciates an Asset at twice the rate done under Straight line method

By nature of this depreciation technique, Assets depreciated expenses are higher at the early years and lower as the Asset is gradually approaching it's terminal life.

The first task is to determine the depreciation rate

= 1/useful life x 100%

=1/4 x 100% = 25%

Next step is to apply the double depreciation rate on the cost (balance) of Asset Yearly

= 2 x Cost of Assets x depreciation rate

Year 1 depreciation expense = 2 x $52,000 x 25% = $26,000

This leaves a net book value of ($52,000 - $26,000) = $26,000

Year 2 depreciation expense = 2 x $26,000 x 25% = $13,000

This leaves a net book value of ($26,000 - $13,000) = $13,000

Year 3 depreciation expense = 2 x $13,000 x 25% = $6,500

However we shall only recognize $5,000 because recognizing $6,500 will deplete the asset value lower than the Salavage Value of $8,000.

This leaves a net book value of ($13,000 - $5,000) = $8,000

C. Offer at the Beginning of the 4th year for $12,400 for the truck

i. If Kleener Co uses the Straight Line method of depreciation, the asset Net Book Value of $19,000 exceeds the offered Value -  it will mean selling at a loss

ii. If the Double declining Balance Method is used However, the Net Book Value of $8,000 is lower than the offer and will be a Profit accepting the Offer.

Thus the depreciation method used will affect the decision of Kleener Co in accepting or rejecting the offer