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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Depreciation Methods

Quick-as-Lightning, a delivery service, purchased a new delivery truck for $45,000 on January 1, 2019. The truck is expected to have a useful life of 10 years or 150,000 miles and an expected residual value of $3,000. The truck was driven 15,000 miles in 2019 and 13,000 miles in 2020.

Required:

1. Compute depreciation expense for 2019 and 2020 using the (a) straight-line method, (b) double-declining-balance method, and (c) units-of-production method.

2. For each method, what is the book value of the machine at the end 2019? At the end of 2020?

3. CONCEPTUAL CONNECTION If Quick-as-Lightning used an 8-year useful life or 100,000 miles and a residual value of $1,000, what would be the effect on (a) depreciation expense and (b) book value under each of the depreciation methods?

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Requirement 1:

Compute depreciation expense for 2019 using (a) straight line method, (b) double declining balance method and (c) units of production method.

Explanation

Calculation of depreciation expense using:

  1. Straight line method for 2019 and 2020:
  2. Under straight line method the depreciation expense is calculated using the following formula:

    Depreciation expense

    = (cost − residual value) / expected useful life

    = (45000 − 3000) / 10 = 4200

    The depreciation expense for 2020 also remains the same under this method.

  3. Double declining balance method for 2019 and 2020:
  4. Under this method first we have to calculate the double declining balance rate and the formula is:

    Double declining balance rate

    = (1 / useful life) * 2

    = (1 / 10) * 2 = 0.2 or 20%

    Then the depreciation expense is calculated by multiplying the double declining balance rate with the book value of the machine.

    Depreciation expense for 2019

    = declining rate * cost of the machine

    = 0.2 * 45000 = 9000

    For 2020 we have to deduct the 2019 depreciation expense of 9000 from the cost of the machine and then multiply it with the declining rate...

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Requirement 2:

To explain:

What is the book value of machine at the end of 2019 and 2020 under each method?

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Requirement 3:

To explain:

If the company used an 8 year useful life or 100000 useful miles and a residual value of $1000 then what would be the effect on (a) depreciation expense and (b) book value under each of these methods?

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