Question

A small truck is purchased for $17,000. It is expected to be of use to the company for 6 years, after which it will
be sold for $3,500. For each of the following cases, determine the depreciation deduction and the resulting book
value during each year of the truck’s life:
a) Use straight-line depreciation.
b) Use declining balance depreciation with a rate of 125% of the straight-line depreciation rate.
c) Use declining balance depreciation with a rate of 150% of the straight-line depreciation rate.
d) Use double declining balance depreciation.
For declining balance and double declining balance, make sure that computed book values intersect with the
estimated salvage value.

Answer 1

	a)	STRAIGHT LINE METHOD:
		Annual Depreciation=(Cost of asset-Salvage Value)/Useful life in years
		Cost of asset	$17,000
		Salvage Salvage Value	$3,500
		Useful Life in years	6
		Annual Depreciation=(17000-3500)/6	$2,250
			Year	Beginning Book Value	Depreciation Amount	Ending Book Value
			1	$17,000	$2,250	$14,750
			2	$14,750	$2,250	$12,500
			3	$12,500	$2,250	$10,250
			4	$10,250	$2,250	$8,000
			5	$8,000	$2,250	$5,750
			6	$5,750	$2,250	$3,500
	b)	125% DECLINING BALANCE METHOD
		Depreciation Rate =125%*(1/Useful Life)=125%*(1/6)	20.83%
				A	B	C=A*B	D=A-C
			Year	Beginning Book Value	Depreciation Rate	Annual Depreciation	Ending Book Value	Straight Line Depreciation
			1	$17,000	20.83%	$3,542	$13,458	$2,250
		There should be Cross over to Straight Line in Year 3	2	$13,458	20.83%	$2,804	$10,655	$2,250
		When, the Straight Line Depreciation is higher	3	$10,655	20.83%	$2,220	$8,435	$2,250
			Year	Beginning Book Value	Depreciation Rate	Annual Depreciation	Ending Book Value
			1	$17,000	20.83%	$3,542	$13,458
			2	$13,458	20.83%	$2,804	$10,655
			3	$10,655		$1,789	$8,866	(Depreciation=(10655-3500)/4
			4	$8,866		$1,789	$7,077
			5	$7,077		$1,789	$5,289
			6	$5,289		$1,789	$3,500