Question

A company purchases a salesman a car for $40,000; the salesman pays $2,000 for an upgraded sound system to make his time on the road more pleasant. The car has an expected salvage value of $2,000 and an expected life of 4 years or 200,000 miles.

During the first year the car was driven 45,000 miles, during the second year 40,000 miles and 50,000 miles the 3rd year

Please show the annual depreciation expense for years 1, 2, 3 using straight line depreciation, double declining balance method, and units of production method. For each method, show the car's book value at the end of year 3.

Answer 1

Capitaliized Cost of Car = $40000+$2000 = $42000.

1: Depreciation expenses under Straight line method :

Annual Deprecation = (Capitalized cost - Salvage value)/ Useful Life =($42000-$2000)/4 = $10,000

Statement showing Depreciation expenses(SLM)

Year 1	$10,000
Year 2	$10,000
Year 3	$10,000
Total Accumulated Depreciation	$30,000

Book value @ end of year 3 = $42000-$30,000 = $12,000

2: Depreciation expenses under double declining method

Double Declining Depreciation rate = 1/useful life * 2 *100

=1/4*2*100 =50%

Depreciation for the year = Book value @ beginning of year * 50% (Depreciation rate)

Statement showing Depreciation expenses (DDM)

Year	Car's book value@ beginning of Year	Annual Depreciation	Car's book value @ end of year
1	$42,000	$21000 ($42,000*50%)	$21000 ($42,000-$21000)
2	$21,000	$10,500 ($21,000*50%)	10,500 ($21000-$10,500)
3	$10,500	$5250 ($10,500*50%)	$5250 ($10,500-$5250)
Accumulated Depreciation		$36750

3:Depreciation expenses under units of Production method

Depreciation per miles = (Capitalized cost - salvage value)/Estimated miles in life

=($42000-$2000)/200,000 = $0.20/mile

Statement Showing Depreciation expenses (UPM)

Year	Runed miles	Calculations	Annual depreciation
1	45,000	45000*$0.20=	$9,000
2	40,000	40000*$0.20=	$8,000
3	50,000	50000*$0.20=	$10,000
Accumulated Depreciation			$27,000

Book value @ end of Year 3 = $42000-27,000 =$15,000