Question

A tractor for over-the-road hauling is purchased for $75,000.00. It is expected to be of use to the company for 6 years, after which it will be salvaged for $4,600.00. Calculate the depreciation deduction and the unrecovered investment during each year of the tractors life.

a) Use straight-line depreciation. Provide depreciation and book value for year 6.

b) Use declining-balance depreciation, with a rate that ensures the book value equals the salvage value. Provide depreciation and book value for year 6.

c) Use double declining balance depreciation. Provide depreciation and book value for year 6.

d) Use double declining balance, switching to straight-line depreciation. Provide depreciation and book value for year 6.

Answer 1

a) Since the asset will be depreciated for 6 year, the depreciation for every year is equal. So, depreciation on year 6= 75000/6=12500

Book Value on year 6= 75000-12500*6=0

b) Say, declining balance rate is r

Hence, at the end of year 6 book value of asset= 75000*(1-r)^6=salvage value= 4600

or, r= 37.2%

Depreciation for year 6= 75000*(1-37.25%)^5-75000*(1-37.2%)^6=$2696.10

Book Value of year 6= 75000*(1-37.2%)^6=$4600

c) Using Double declining balance method, the depreciation in year 1= 2*(cost of asset/life of asset)=2*(75000/6)=25000

Book Value of asset after year 1= 75000-25000=50000

Depreciation in year 2= 2*(50000/5)=20000

Book Value of asset in year 2= 50000-20000=30000

Depreciation in year 3= 2*(30000/4)=15000

Book Value after year 3= 30000-15000=15000

Depreciation in year 4= 2*(15000/3)=10000

Book Value after year 4= 15000-10000=5000

Depreciation in year 5= 2*(5000/2)=5000

Book Value after year 5 or in 6th year=5000-5000=0