Question

Costco purchased a truck from a company going out of business for $40,000. An appraisal indicated the fair value of the truck to be $42,000. Costco estimated the truck would provide future benefits for 3 years and would bring an $8,800 residual value at the end of the 3-year period.

How much is the depreciation expense for the second year if the company uses the double- declining-balance method?

Answer 1

Depreciation expense for the second year = $ 8,889

Explanation

	Double Declining Balance Depreciation
	Beginning book value	x	Double the straight-	=	Depreciation expense
			line rate
First year's depreciation	40,000.00	x	2/3	=	26,667.00
Second year's depreciation	13,333.00	x	2/3	=	8,889.00
Explanation:
Double-declining-balance rate = (100% / 3 years) × 2 = 2/3 per year
Book value at beginning of second year = $40,000 – $26,667 = $13,333