Depreciation Methods ESA. On January 13, 2013, Precision Oil Company purchased a

ID: 2569159 • Letter: D

Question

Depreciation Methods ESA. On January 13, 2013, Precision Oil Company purchased a drilling truck for $90,000. Precision expects the truck to last five years or 200,000 miles, with an estimated residual value of $15,000 at the end of that time. During 2014, the truck is driven 48,000 miles. Precision's year end is December 31. Compute the depreciation for 2014 under each of the follow- ing methods: (1) straight-line, (2) production, and (3) double-declining-balance. Using the amount computed in (3), prepare the journal entry to record depreciation expense for the second year, and show how the Drilling Truck account would appear on the balance sheet

Explanation / Answer

1. Depreciation under straight line method of depreciation.

Cost of Truck = $90,000

Salvage Value of truck = $15,000

Useful life of asset = 5 years.

Depreciation each year = ($90,000 - $15,000) / 5 years = $15,000 annual depreciation

2. Depreciation on production basis method.

Estimated life of asset = 200,000 miles

Depreciation per mile = ($90,000 - $15,000) / 200,000 = $0.375 per mile

Truck driven in 2014 = 48,000 miles

Depreciation for 2014 on Production basis = 48,000 miles x $0.375 per mile = $18,000

3. Double Declining Method.

Under double declining method, depreciation is charged at double the rate charged in straight line method. Moreover, salvage value is not considered under this method.

Depreciation for 2013(Assumed for whole year) = $90,000 / 5 years x 2 = $36,000

Book Value of asset in Jan 2014 = $90,000 - $36,000 = $54,000

Depreciation for year 2014 = $54,000 / 5 years x 2 = $21,600

4. Journal Entry

Journal Entry for Depreciation

Date

Particulars

Dr. Amount (in$)

Cr. Amount (in$)

31/12/2014

Depreciation on Truck

TO Accumulated Depreciation- Truck

21,600

Balance Sheet as on 31st Dec, 2014

Assets

Amount

Equity & Liabilities

Amount

Fixed Assets:

Trucks 90,000

Less: Accumulated Dep. (57,600)

32,400