Question

Question 1
Sydney Tour Company purchased a van for $150,000. The company expected the van to be used for 10 years, or 200,000 miles, with an estimated residual value of $2,000 at the end of that time. Actual usage of the van for the first 3 years were as follows:
 Year 1: 5,000 miles
 Year 2: 10,000 miles
 Year 3: 12,000 miles
Required
a) Calculate the depreciation for the second year under each of the methods below
I. Straight-line
II. Units of production
b) Show how the asset of van would appear in the balance sheet prepared at the end of the second year if the straight-line method was used
c) What factors should be considered in the selection of a depreciation method?

Answer 1

a) I) Straight Line Method:

Depreciation expense per year = (Cost - Residual Value)/Useful Life in years

= ($150,000 - $2,000)/10 yrs = $14,800 per year

Depreciation expense under straight line method remain same over the life of the asset.

Therefore, the depreciation for the second year under straight line method is $14,800.

II) Units of Production Method:

Depreciation expense per unit = (Cost - Residual value)/Useful Life in miles

= ($150,000 - $2,000)/200,000 miles = $0.74 per mile

Depreciation expense for second year = Actual usage of miles for 2nd year*Depreciation per mile

= 10,000 miles*$0.74 per mile = $

Therefore depreciation for the second year under units of production method is $7,400.

2) Sydney Tour Company

Partial Balance Sheet for Second Year (Amounts in $)

Assets
Fixed Assets
Tangible Assets
Equipment, cost	150,000
Less: Accumulated Depreciation (14,800*2 yrs)	(29,600)
Equipment, net	120,400

3) Depreciation method is used for calculating depreciation expense for an asset. There are various depreciation methods including straight line method, double declining balance method, units of production method etc.

The company should choose that depreciation method which is most appropriate for its business. The asset cost should be allocated to accounting periods according to the benefits received from the use of asset. The most commonly used depreciation method is straight line method. It is very simple method and depreciation under this method is very easy to calculate.