Speedy Delivery Company purchases a delivery van for $31,000. Speedy estimates t

Question

Speedy Delivery Company purchases a delivery van for $31,000. Speedy estimates that at the end of its four-year service life, the van will be worth $4,600. During the four-year period, the company expects to drive the van 100,000 miles

  

Actual miles driven each year were 30,000 miles in year 1; 32,000 miles in year 2; 28,000 miles in year 3; and 16,000 miles in year 4. Note that actual total miles of 106,000 exceed expectations by 6,000 miles

  

Calculate annual depreciation for the four-year life of the van using each of the following methods. (Do not round intermediate calculations. Enter your answers for "Depreciation Rate" as numbers, not percentages, rounded to 3 decimal places.)

Straight-line.

Years 1,2,3,4 , Annual depreciation, year-end value

Double-declining-balance.

Years 1,2,3,4, beginning book value x depreciation rate = depreciation expense, accumulated depreciation, book value

Activity-based.

Years 1,2,3,4, miles driven x depreciation rate = depreciation expense, accumulated depreciation, book value

Speedy Delivery Company purchases a delivery van for $31,000. Speedy estimates that at the end of its four-year service life, the van will be worth $4,600. During the four-year period, the company expects to drive the van 100,000 miles

Explanation / Answer

Hi,

Please find the answer as follows:

Part A : Straight Line Method:

Annual Depreciation = (Cost - Salvage Value)/Estimated Life = (31000 - 4600)/4 = 6600

Year

Depreciation

Year 1

6600

Year 2

6600

Year 3

6600

Year 4

6600

Part B: Double Declining Method:

Depreciation Rate as Straight Line Method = Depreciation/(Cost - Salvage Value)*100 6600/(31000-4600)*100 = 25%

Depreciation Rate as Double Declining Method = 25%*2 = 50%

Year 1 = 31000*50% = 15500

Year 2 = (31000 - 15500)*50% = 7750

Year 3 = (31000 - 15500 - 7750)*50% = 3875

Year 4 = 0 (since net book value is less than the salvage value)

Year 1 = (31000 - 4600)*30000/100000 = 7920

Year 2 = (31000 - 4600)*32000/100000 = 8448

Year 3 = (31000 - 4600)*28000/100000 = 7392

Year 4 = (31000 - 4600)*(16000 - 6000)/100000 = 2640

Notes:

1) Depreciation under Activity Based will be calculated with the use of following formula:

(Cost - Salvage Value)*Miles in a Particular Year/Total Estimated Miles

2) We will deduct excess miles of 6000 from the estimated miles of 16000 in the final year.

Thanks.

Year

Depreciation

Year 1

6600

Year 2

6600

Year 3

6600

Year 4

6600

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