Question

A delivery van costing $37,000 is expected to have a $2,900 salvage value at the end of its useful life of five years. Assume that the truck was purchased on January 1. Compute the deprecation expense for the first two calendar years under the following deprecation methods. A. Straight Line B. Double-declining- balance

Answer 1

Answer:

A.

Depreciation expense for the first year: $6,820

Depreciation expense for the second year: $6,820

B.

Depreciation expense for the first year: $13,640

Depreciation expense for the second year: $8,184

Explanation:

A. The company uses straight-line depreciation method, Depreciation Expense each year is calculated by following formula:  

Annual Depreciation Expense = (Cost of delivery van − Salvage Value )/Useful Life = ($37,000 - $2,900)/5 = $6,820

Depreciation expense for the first year: $6,820

Depreciation expense for the second year: $6,820

B. The company uses Double-declining- balance method

Under the straight-line method, useful life is 5 years, so the asset's annual depreciation will be 20% of the Depreciable cost.

Depreciable cost = Total asset cost - salvage value =  $37,000 - $2,900 = $34,100

Under the double-declining-balance method the 20% straight line rate is doubled to 40% - multiplied times the Depreciable cost's book value at the beginning of the year.

Depreciation expense for the first year = $34,100 x 40% = $13,640

At the beginning of second year, the Depreciable cost's book value is $34,100-$13,640 = $20,460

Depreciation expense for the second year = $20,460 x 40% = $8,184