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Brief Exercise 9.10 Alternative Depreciation Methods (LO9-4)

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M. C. Jones purchased a truck for $30,500 to be used in his business. He is considering depreciating the truck by two methods: units-of-output (assuming total miles driven of 80,000) and double-declining-balance (assuming a 5-year useful life). The truck is expected to be sold for approximately $6,500 at the end of its useful life.

Brief Exercise 9.10 Part a

Prepare a comparison of the first year’s depreciation expense that would be recognized by Jones under these methods, assuming the truck was actually driven 10,000 miles in the first year.

Answer 1

Units of Production method
A	Cost	$          30,500.00
B	Residual Value	$            6,500.00
C=A - B	Depreciable base	$          24,000.00
D	Usage in units(in Miles)	80000
E	Depreciation per Mile	$                     0.30

Year	Book Value	Usage	Depreciation expense	Ending Book Value	Accumulated Depreciation
1	$ 30,500.00	10000	$ 3,000.00	$ 27,500.00	$ 3,000.00

Double declining Method
A	Cost	$          30,500.00
B	Residual Value	$            6,500.00
C=A - B	Depreciable base	$          24,000.00
D	Life [in years]	5
E=C/D	Annual SLM depreciation	$            4,800.00
F=E/C	SLM Rate	20.00%
G=F x 2	DDB Rate	40.00%

Year	Beginning Book Value	Depreciation rate	Depreciation expense	Ending Book Value	Accumulated Depreciation
1	$ 30,500.00	40.00%	$ 12,200.00	$ 18,300.00	$ 12,200.00

If Double declining balance method is used Depreciation expense will be higher in Year one as compared to Units of production method.