a)
Calculate the amount of
1. Straight-line.
2. Double-declining-balance.
3. Units-of-output (based on miles).
a)

Explanation of Solution
1. Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Truck cost is $20,000, expected residual value is $4,000 and estimated useful life is 5 years.
Calculate the amount of depreciation expense under Straight-line depreciation method in the first and second years of the truck’s useful life:
The annual depreciation of the truck is $3,200.
Therefore, the amount of depreciation expense for the first and second years is $3,200.
2. Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.
Calculate depreciation expense for first year under Double-declining-balance method:
Truck cost is $20,000, expected residual value is $4,000 and estimated useful life is 5 years.
Therefore, depreciation expense for first year under double declining method is $8,000.
Calculate depreciation expense for second year under Double-declining-balance method:
Truck cost is $20,000, expected residual value is $4,000 and estimated useful life is 5 years.
Therefore, depreciation expense for second year under double declining method is $4,800.
3. Unit-of-output Method: Under this method of depreciation, the depreciation expense is calculated on the basis of output in a year. This method is suitable when a company has fluctuating productive rate. The formula to calculate the depreciation expense under this method is as follows:
Compute the first year depreciation of the truck:
Truck cost is $20,000, expected residual value is $4,000 and estimated useful life is 5 years.
Hence, depreciation expense for the first year under units of output method is $2,000.
Compute the second year depreciation of the truck:
Hence, depreciation expense for the second year under units of output method is $4,000.
b)
Prepare the plant assets section of the
b)

Explanation of Solution
Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the plant assets section of the balance sheet at the end of the second year of the asset’s useful life under the straight-line method:
Incorporation T | ||
Balance sheet | ||
As on second year end | ||
Assets: | ||
Truck | $20,000 | |
Less: Accumulated depreciation (1) | ($6,400) | $13,600 |
Table (1)
Accumulated depreciation: The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation
Therefore, the accumulated depreciation at the end of second year is $6,400
c)
Identify the method of depreciation, in which it is not possible to ascertain the actual amount of depreciation expense prior to the end of each year. Explain the causes for this uncertainty.
c)

Explanation of Solution
The unit of output method is the method of depreciation, in which it is not possible to ascertain the actual amount of depreciation expense prior to the end of each year. The reason for such uncertainty is, to calculate the depreciation expense amount actual output (estimated number of miles driven) is used.
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