On January 1, Year 1 Missouri Co. purchased a truck that cost $49,000. The truck had an expected useful life of 10 years and a $5,000 salvage value. Missouri uses the double declining-balance method. What is the amount of depreciation expense recognized in Year 2?

The amount of depreciation expense recognized in Year 2 = $7,800.

Explanation:

Determine the depreciation base

The depreciation base = Acquisition cost - Residual/Salvage value.

The depreciation base = 49,000 - 5,000

The depreciation base = $44,000.

Determining the depreciation rate

The depreciation rate = depreciation base / Useful life

The depreciation rate = 44,000/10

The depreciation rate = $ 4,400.

To determine depreciation % rate

Depreciation % rate = (The depreciation rate / depreciation base) * 100

Depreciation % rate = (4,400 / 44,000) * 100

Depreciation % rate = 10 %

But since Missouri Co. uses double declining balance method of depreciation, the correct depreciation % rate is 10 * 2 = 20%

Determining the depreciation expense for year 2

Year 2 depreciation expense is computed as follows:

(Acquisition cost - year 1 depreciation expense) * Depreciation % rate

Depreciation expense for year 2 is computed as:

Acquisition cost * Depreciation % rate = 49,000 * 20%

Year 1 depreciation expense = $9,800.

Therefore year 2 depreciation expense = (49,000 - 9,800.) * 20%

Therefore year 2 depreciation expense = $ 7,800.