Question

• On January 1, 2006 the Excel Delivery Company purchased a delivery van for $65,000.
• Useful life is 5 years and it has a salvage value of $15,000
• The company expects to drive the van 125,000 miles
• The following is the actual miles driven
  • 2006 – 40,000 miles
  • 2007 – 35,000 miles
  • 2008 – 25,000 miles
  • 2009 – 21,000 miles
  • 2010 – 11,000 miles

Required – Calculate annual depreciation for the five year life of the van using each of the following methods – (round to nearest dollar):

• Straight line
• Sum of the years digits
• Double declining method
• Units of production using miles driven

Answer 1

Solution:

Straight line method
Cost	65000
Less: Salvage Value	15000
Depreciable value	50000
Depreciation per year	=$50000/5
	$10,000.00

$10000 per year every year fro 5 years

2.

Sum of digits method
Sum of digits = 5yrs+4yrs+3yrs+2yrs+1yr = 15
Year	Ratio	Depreciation (Ratio * $50000)	Carrying Value
			65000
2016	=5/15	16666.67	48333.33
2017	=4/15	13333.33	35000.00
2018	=3/15	10000.00	25000.00
2019	=2/15	6666.67	18333.33
2020	=1/15	3333.33	15000.00
Total		50000.00

3.

Double declining balance method
Cost	65000
Salvage Value	15000
Useful Life (years)	5
Straight line rate	20%
Doubling the rate	=20%*2
	40%

Year	computation	Depreciation Expense	Accumulated Depreciation	Book Value
				65000
2016	65000*40%	26000	26000	39000
2017	39000*40%	15600	41600	23400
2018	23400-15000	8400*	50000	15000
2019		0	50000	15000
2020		0	50000	15000

* The depreciation calculated for 2018 will decrease the book value of the asset below its estimated residual value ($23400-9360 = $14040 < $15000). Therefore, depreciation would only be allowed up to the point where book value = salvage value. Thus, depreciation expense of $8400 (= 23400-15000) is allowed.

4.

Production method
Cost	$65,000
Less: Salvage Value	$15,000
Depreciable value	$50,000
Miles	125000
Depreciation per Mile	$0.40

Year	Miles used	Depreciation (Miles used * $0.40)	Carrying value
			$65,000.00
1	40000	$16,000.00	$49,000.00
2	35000	$14,000.00	$35,000.00
3	25000	$10,000.00	$25,000.00
4	21000	$8,400.00	$16,600.00
5	11000	$1,600.00*	15,000.00
Total	132000	50000

* restricted to obtain the residual value.