Question

Ron's Don't Wait Inc (RDW) purchased a delivery van on July 1, 2019. The Van cost $65,000 and has an estimated life of 5 years or 200,000 kms and a residual value of $5,000. RDW uses exact months for it's depreciation. RDW estimates the Van will be driven 22,000 kms in 2019, 55,000 in 2020, 48,000 in 2021, 65,000 in 2022, and 25,000 in 2023.

Required

Prepare the following depreciation schedule for all 5 years for each of the following methods:

      a) Straight Line

b) Double-Declining Balance

c) Units of Output

	depreciation expense	cost	accumulated depreciation	net book value
2019
2020
2021
2022
2023

Which method should RDW Inc adopt if it wants to maximize it's earnings in 2020?

Answer 1

Ron's Don't Wait Inc (RDW) purchased a delivery van on July 1, 2019. The Van cost $65,000 and has an estimated life of 5 years or 200,000 kms and a residual value of $5,000.

1.

Straight line depreciation each year = ( cost - salvage vaue) / useful life = ( 65000 - 5000 ) /5 = $12000 each year..

For 2019 , the van is acquired on July1, so depreciation will be only for 6 months ( July to dec) i.e $ 12000 *6/12 = $ 6000.

Year	Cost	Depreciable value	Depreciation expenses	Accumulated depreciation	Net Book Value
2019	$ 65,000	$ 60,000	$        6,000	$        6,000	$        59,000
2020	$ 65,000	$ 60,000	$      12,000	$      18,000	$        47,000
2021	$ 65,000	$ 60,000	$      12,000	$      30,000	$        35,000
2022	$ 65,000	$ 60,000	$      12,000	$      42,000	$        23,000
2023	$ 65,000	$ 60,000	$      12,000	$      54,000	$        11,000

2. Double declining balance method , this method assumes the double rate of depreciation of straight line method, and depreciation is charged on the revised value.

Rate = 2 * ( 1/ useful life ) = 2 * ( 1/ 5 ) = 2 * 20% = 40%

Depreciation for 2019 = cost * rate = $ 65000 * 40% = 26000 , but only 6 months depreciation will be charged, so the depreciation will be = $13000 and the rate wil be 20% for 2019.

for 2020 , the depreciation will be @ 40% calculated on the revised value of $ 52000 ( 65000 - 13000 ) @ 40% = $ 20800.

Year	Cost	Book Value year start	Depreciation Rate	Depreciation expenses	Accumulated depreciation	Net Book Value
2019	$ 65,000	$ 65,000	20%	$      13,000	$      13,000	$ 52,000
2020	$ 65,000	$ 52,000	40%	$      20,800	$      33,800	$ 31,200
2021	$ 65,000	$ 31,200	40%	$      12,480	$      46,280	$ 18,720
2022	$ 65,000	$ 18,720	40%	$        7,488	$      53,768	$ 11,232
2023	$ 65,000	$ 11,232	40%	$        4,493	$      58,261	$    6,739

3. Unit of output method, total KMS driven = 200,000 kms , in 2019 it is driven 22000,kms , 55,000 kms in 2020, 48,000 kms in 2021, 65,000kms in 2022, and 25,000kms in 2023.

Here the depreciation is charged on proportinal basis of Kms driven in year to the total Kms, on the depreciable value.

Depreciable value = cost - Accumulated depreciation = $ 65000 - 5000 = $60000.

2019 depreciation = $60000 * 22000 / 200000 = $ 6600 , here for 2023 the depreciation will be only for 10000 kms as 200000 kms is expired on using it and no depreciation will be charged if salvage value is reached.

Year	Cost	Depreciable value	Kms used	Depreciation expenses	Accumulated depreciation	Net Book Value
2019	$ 65,000	$ 60,000	22000	$        6,600	$         6,600	$ 58,400
2020	$ 65,000	$ 60,000	55000	$      16,500	$      23,100	$ 41,900
2021	$ 65,000	$ 60,000	48000	$      14,400	$      37,500	$ 27,500
2022	$ 65,000	$ 60,000	65000	$      19,500	$      57,000	$    8,000
2023	$ 65,000	$ 60,000	25000	$        3,000	$      60,000	$    5,000

Which method should RDW Inc adopt if it wants to maximize it's earnings in 2020?

Here to maximise the earning depreciation being an expenses should be less, the minimum depreciation giving method should be adopted in order to maximise the earning , the depreciation on straight line basis is $ 12000 , Double declining method basis = $ 20800 and units of output method = $ 16500 , the lowest depreciation is of striaght line method.

Thus straight line method of depreciation should be adopted if it wants to maximise its earning in 2020.