Question

Question 1

On 2 January 2016, Southern Pizza bought a used Nissan delivery van for R19 200. The van was expected to remain in service for four years (30 000 kilometres). At the end of its useful life, Southern’s officials estimated that the van’s residual value would be R2 400. The van travelled 8 000 km the first year, 8 500 km the second year, 5 500 km the third year, and 8 000 km in the fourth year. Prepare a schedule of depreciation expense per year for the van under the three depreciation methods. (For units-of-production and double-declining-balance, round to the nearest two decimals after each step of the calculation.)

Required

a) Which method best tracks the wear and tear on the van?

b) Which method would Southern prefer to use for income tax purposes? Explain in detail why Southern prefers this method.

Answer 1

The 3 important depreciation methods used are

1. Straight line method
2. Double decline balance method
3. units-of-production method

let us calculate the depreciation under different methods

1. Straight line method

Depreciation Cost= (cost of the asset- salvage value)/useful life of asset

=(19200-2400)/4

= 4200 per year

Rate of depreciation = Depreciation cost / depreciable value of the asset*100

=4200/(19200-2400)*100 = 25%

2. Double decline balance method

Under the double decline balance method the rate of depreciation would be 2 X rate of depreciation as per Straight line method

that equals to 2*25= 50%

Depreciation for 1st year = (cost-salvage value)*50%

=(19200-2400)*50% = 16800*50%

=8400

Depreciation for 2nd year = (16800-8400)*50%

= 8400*50% = 4200

Depreciation for 3rd year = (8400-4200)*50%

=2100

Depreciation for 4th year = (4200-2100)*50%

=1050

3.units-of-production method:

Depreciation expense= (cost of asset- salvage value)*no of kms used in the year/total no of Kms

Depreciation for 1st year = (19200-2400)*8000/30000

= 4480

Depreciation for 2nd year = (19200-2400)*8500/30000

= 4760

Depreciation for 3rd year = (19200-2400)*5500/30000

=3080

Depreciation for 4th year = (19200-2400)*8000/30000

=4480

Lets see the table for summary of all the methods

	Straight line Method	Double decline balance method	units-of-production method
Year 1	4200	8400	4480
Year 2	4200	4200	4760
Year 3	4200	2100	3080
Year 4	4200	1050	4480
Total	16800	15750	16800

Conclusion 1: of all the methods units of production method provides the best track of wear and tear as it is calculated according to the actual use of the Van.