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1.
To compute:
The amount of
1.
Explanation of Solution
Given,
Cost of the van is $44,000.
Salvage value is $2,000.
Useful life is 4 years.
Formula to calculate depreciable cost:
Substitute $44,000 as cost of the van and $2,000 as salvage value,
Total depreciable cost is $42,000.
Computation of depreciation amount,
| Year | Straight line ($) |
Units of production ($) |
Double Declining Balance ($) |
|---|---|---|---|
| 2013 | 10,500 | 8,400 | 22,000 |
| 2014 | 10,500 | 12,600 | 11,000 |
| 2015 | 10,500 | 14,000 | 5,500 |
| 2016 | 10,500 | 7,000 | 2,750 |
| Total | 42,000 | 42,000 | 42,000 |
Table (1)
Working Note:
Useful years are 4 years.
Total cost is $42,000.
Formula to calculate depreciation:
Depreciation that will be charged in the 4 years with respect o straight line method is $10,500.
Year 2013
Given,
Total miles driven in year 1 are $12,000.
Total cost is $44,000.
Total miles driven are $60,000.
Formula to calculate depreciation with respect to units of production:
Depreciation per unit is 0.7 per miles.
Computation of depreciation:
Depreciation that will be charged in the first year is $8,400.
Double declining balance method
Given,
Book value of the asset is $44,000.
Useful life is 4 years.
Computation of depreciation rate:
Double declining depreciation rate is 50%.
Computation of depreciation in the first year:
Depreciation that will be charged in the first year is $22,000.
Year 2014
Unit of production method
Miles driven are $18,000 (given).
Depreciation per mile is 0.7 per unit (calculated above).
Computation of depreciation,
Depreciation that will be charged in the second year is $12,600.
Double declining balance method
Computation of book value in year 2:
Book value at the beginning of the 2014 year is $22,000.
Computation of depreciation in the second year:
Depreciation that will be charged in the 2014 year is $11,000.
Year 2015
Unit of production method
Miles driven are $21,000 (given).
Depreciation per mile is 0.7 per unit (calculated above).
Computation of depreciation,
Depreciation that will be charged in the second year is $14,000.
Double declining balance method
Computation of book value in year 2:
Book value at the beginning of the 2015 year is $11,000.
Computation of depreciation in the 2015 year:
Depreciation that will be charged in the 2015 year is $5,500.
Year 2016
Unit of production method
Miles driven are $10,000 (given).
Depreciation per mile is 0.7 per unit (calculated info).
Computation of Depreciation,
Depreciation that will be charged in the second year is $7,000.
Double Declining Balance method
Computation of book value in year 2:
Book value at the beginning of the 2016 year is $5,500.
Computation of depreciation in the 2016 year:
Depreciation that will be charged in the 2016 year is $2,750.
2.
To explain:
The treatment of annual depreciation.
2.
Explanation of Solution
• The annual depreciation will be calculated annually at the end of the financial period.
• The annual depreciation will be treated as an expense for the company and will come in the debit side of the
Hence, the annual depreciation will be treated as an expense.
3.
To explain:
the impact of depreciation method as compared to van’s life.
3.
Explanation of Solution
• In straight line method the depreciation remains constant throughout the course of life. Hence, the same amount of depreciation will be deducted from the net income.
• In the unit of production method, it is calculated as peer the miles driven, it is an effective way of applying depreciation and the burden of depreciation expense shift from year to year as per the vehicle used.
• In double declining method, the depreciation applied is more in the initial years and very less in the end years and the less amount is deducted at the end years, thereby less expenses is deducted from the net income at the end years of the vehicle.
Hence, the impact of depreciation is different in each method.
4.
To compute:
The book value for each year.
4.
Explanation of Solution
Double declining balance method
Year 2014
Double declining balance method
Computation of book value in year 2014:
Year 2015
Book value at the beginning of the year 2015 is $22,000.
Double declining balance method
Computation of book value in year 2015:
Hence, the book value is $11,000
Year 2016
Book value at the starting of the year is $11,000.
Double declining balance method
Computation of book value in year 2016:
The book value will be reported in the asset side of the
Hence, the book value will be shown in the asset side of the balance sheet.
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