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16 December, 17:56

A delivery truck costing $25,000 is expected to have a $1,500 salvage value at the end of its useful life of four years or 125,000 miles. Assume that the truck was purchased on January 2. Calculate the depreciation expense for the second year using each of the following depreciation methods: (a) straight-line, (b) double-declining balance, and (c) units-of-production. (Assume that the truck was driven 28,000 miles in the second year.) Round all answers to the nearest dollar.

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  1. 16 December, 19:04
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    a.

    Depreciation expense year 2 Straight line = $5875

    b.

    Depreciation expense year 2 Double declining = $6250

    c.

    Depreciation expense year 2 units of activity = $5264

    Explanation:

    a.

    Straight line method is a depreciation method that charges a constant depreciation expense through out the useful life of the asset. Straight line depreciation per year is,

    Straight line depreciation = (Cost - Salvage value) / Estimated useful life

    Straight line depreciation = (25000 - 1500) / 4 = $5875 per year

    Straight line rate = 100% / 4 = 25%

    b.

    Double declining balance is an accelerated method of depreciation that charges more depreciation in the initial years and less in later years. Double declining balance depreciation is calculated as follows,

    Depreciation expense = 2 * Straight line rate * Book value at start of the period

    Depreciation expense year 1 = 2 * 0.25 * 25000 = $12500

    Book value at start of year 2 = 25000 - 12500 = $12500

    Depreciation year 2 = 2 * 0.25 * 12500 = $6250

    c.

    The units of production method charges depreciation based on the activity for which asset is used as a proportion of the estimated useful life in terms of activity.

    Depreciation expense year 2 = (28000 / 125000) * (25000 - 1500)

    Depreciation expense year 2 = $5264
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