On January 1, 2018, the Excel Delivery Company purchased a delivery van for $33,
ID: 2598547 • Letter: O
Question
On January 1, 2018, the Excel Delivery Company purchased a delivery van for $33,000. At the end of its five-year service life, it is estimated that the van will be worth $3,000. During the five-year period, the company expects to drive the van 100,000 miles. Required: Calculate annual depreciation for the five-year life of the van using each of the following methods. 1. Straight line. 2. Sum-of-the-years'-digits. 3. Double-declining balance. 4. Units of production using miles driven as a measure of output, and the following actual mileage: Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Calculate annual depreciation for the five-year life of the van using straight line method. Straight-line per year Required 1 Required 2>Explanation / Answer
Solution:
Part 1 – Depreciation as per Straight Line Method
Straight line method is a method of calculating depreciation of an asset.
Under this method depreciation is calculated by dividing depreciable asset value by estimated useful life.
Depreciable Asset Value = Cost of Asset – Salvage Value
In this method, depreciation for each year remains same.
Mathematically,
Annual Depreciation = (Cost of Asset – Salvage Value) / Useful life
Annual Depreciation = (33,000 - $3,000)/ 5 = $6,000
Straight line $6,000 per year
Part 2 – Depreciation as per sum of the years digit (SYD)
Sum of the years digit method of depreciation is accelerated depreciation technique which are based on the assumption that assets are generally more productive when they are new and their productivity decreases as they become old.
SYD Depreciation = Depreciable Base x Remaining Useful Life / Sum of Years Digit
Depreciable Base = Cost of Asset – Salvage Value = 33,000 – 3,000 = 30,000
Sum of Years Digit = n(n+1)/2 = 5(5+1)/2 = 15
Year
Depreciation
Working
2018
$10,000
Remaining life 5 /15 x $30,000
2019
$8,000
Remaining life 4 /15 x $30,000
2020
$6,000
Remaining life 3 /15 x $30,000
2021
$4,000
Remaining life 2 /15 x $30,000
2022
$2,000
Remaining life 1 /15 x $30,000
Total
$30,000
Part 3 ---- Declining-balance method at double the straight-line rate
It is a method of depreciation used by the companies when they want to quickly depreciate an asset.
The asset will depreciate much faster under this method than straight-line because we double the percentage that would be depreciated each year under straight-line.
Salvage value is not subtracted from Cost of Asset when depreciation is calculated by using this method.
The formula for double declining balance is:
Annual depreciation = Book Value * 100% / life * 2
Calculate the percentage that should be used first.
Percentage = 100% / Useful Life x 2 = 100/5*2 =
Once the percentage is calculated, it is the same for the rest of the asset’s life.
Depreciation Amount
Year
DDB Depreciation for the period
End of Period
Beginning of period book value
Depreciation Rate
Depreciation Expenses
Accumulated Depreciation
Book Value
2018
33,000
40.00%
13,200
13,200
19,800
2019
19,800
40.00%
7,920
21,120
11,880
2020
11,880
40.00%
4,752
25,872
7,128
2021
7,128
40.00%
2,851
28,723
4,277
2022
4,277
40.00%
1,277
30,000
3,000
Part 4 – Depreciation as per units of production using miles driven
Depreciation Rate per mile = (Cost of Asset – Salvage Value) / Expected Miles Drive
= (33,000 – 3,000) / 100,000
= $0.30 per mile
Year
Miles
Depreciation Rate per miles
Depreciation (Miles x Rate per Miles)
2018
22,000
$0.30
$6,600
2019
24,000
$0.30
$7,200
2020
15,000
$0.30
$4,500
2021
20,000
$0.30
$6,000
2022
21,000
$0.30
$6,300
Total
$30,600
Year
Depreciation
Working
2018
$10,000
Remaining life 5 /15 x $30,000
2019
$8,000
Remaining life 4 /15 x $30,000
2020
$6,000
Remaining life 3 /15 x $30,000
2021
$4,000
Remaining life 2 /15 x $30,000
2022
$2,000
Remaining life 1 /15 x $30,000
Total
$30,000