Question

1.straight-line,

2.units-of-production, and

3. double-declining-balance.

On January 8, 2007, Big 5 purchases a van to transport kayak back to the point of departure at the conclusion of the kayaking adventures they operate. The cost of the van is $38,000. It has an estimated salvage value of $2,000 and is expected to be used for four years. The van is estimated to be driven 11,000 miles in 2007, 16,000 miles in 2008, 19,000 in 2009 and 23,000 in 2010.

1. Compute the annual depreciation expense for each year of the van’s estimated useful life.

2. Explain when and how annual depreciation is recorded. Prepare journal entries

3. Explain the impact on income of this depreciation method versus others over the van’s life.

4. Identify the van’s book value for each year of its life and illustrate the reporting of this amount for any one year.

5. Prepare a depreciation schedule(for each depreciation method)

Answer 1

Answer to Point 1, 4 and 5                          

Depreciation Schedule

Cost of the Van = $ 38,000

Salvage Value = $ 2,000

Useful Life = 4 years

Straight Line Method:

Year	Opening Value(in $)	Depreciation for the year (in $)	Accumulated Depreciation (in $)	Closing Value (in $)
1	38,000	9,000	9,000	29,000
2	29,000	9,000	18,000	20,000
3	20,000	9,000	27,000	11,000
4	11,000	9,000	36,000	2,000

Depreciation formula under SLM = (Cost – Salvage Value) ÷ Useful Life

                                                                = (38,000 – 2000) ÷ 4

                                                                = 9,000

Units of Production Method

Estimate Drive:

2007: 11,000 miles

                2008: 16,000 miles

                2009: 19,000 miles

                2010: 23,000 miles

Total miles : 69,000 miles

Depreciable amount = Cost – Salvage Value

                                                = $ 38,000 - $ 2,000

                                                = $ 36,000

Depreciation amount = Depreciable amount ÷Total miles

                                = 36,000 ÷ 69,000

                                = .52 $ Per miles

Year	Opening Value (in $)	Depreciation for the year (in $)	Accumulated Depreciation (in $)	Closing Value(in $)
1	38,000	5,739.13	5,739.13	32,260.87
2	32,260.87	8,347.83	14,086.96	23,913.04
3	23,913.04	9,913.04	24,000.00	14,000.00
4	14,000.00	12,000.00	36,000.00	2,000.00

Working Notes:

                Year 1 Deprecation = 11,000 × .52 = 5,739.13

                Year 2 Deprecation = 16,000 × .52 = 8,347.83

                Year 3 Deprecation = 19,000 × .52 = 9,913.04

                Year 4 Deprecation = 23,000 × .52 = 12,000

Double-Declining Balance Method

Under the double declining balance method, double means twice or 200% of the straight line depreciation rate.

First we will compute the depreciation rate under SLM, for this purpose salvage value will be ignored.

Under the straight line method, the 4 year life means the asset's annual depreciation will be 25% of the asset's cost. Under the double declining balance method the 25% straight line rate is doubled to be 50%. However, the 50% is multiplied times the asset's beginning of the year book value instead of the asset's original cost.

Year	Opening (in $)	Depreciation (in $)	Accumulated Depreciation (in $)	Closing (in $)
1	38,000	19,000	19,000	19,000
2	19,000	9,500	28,500	9,500
3	9,500	4,750	33,250	4,750
4	4,750	2,375	35,625	2,375

Van’s book value will be reported Net of Accumulated Depreciation under Non-Current Assets –Tangible Asssts.

Answer to Point 2

To record the depreciation following journal entry is passed each year:

Year 1 (SLM):

                Depreciation Van   A/C              9,000

                                To Accumulated Depreciation-Van A/C                  9,000

(Being depreciation charged on van under SLM)

Year 1 (Units of Production method):

                Depreciation Van   A/C              5,739.13

                                To Accumulated Depreciation-Van A/C                  5,739.13

(Being depreciation charged on van under Units of Production method)

Year 1 (Double Declining method):

                Depreciation Van   A/C              19,000

                                To Accumulated Depreciation-Van A/C                  19,000

(Being depreciation charged on van under Double Declining method)

Similarly, journal entries for every year will be posted.

Answer to Point 3

Straight Line Method: Under SLM depreciation is charged on systematic basis over the useful life of the asset. In this method, each year the same amount is charged to profit & loss in respect of a particular asset.

Units of Production Method: The unit of production method of depreciation is based on an asset's usage, activity, or parts produced instead of the passage of time. Under the units of production method, depreciation during a given year will be very high when many units are produced, and it will be very low when only a few units are produced.

Double-Declining Balance Method: Under the double declining balance method, double means twice or 200% of the straight line depreciation rate.

Under the straight line method, the 4 year life means the asset's annual depreciation will be 25% of the asset's cost. Under the double declining balance method the 25% straight line rate is doubled to be 50%. However, the 50% is multiplied times the asset's beginning of the year book value instead of the asset's original cost.

This means that the double declining balance method will result in greater depreciation expense in each of the early years of an asset's life and smaller depreciation expense in the later years of an asset's life as compared to straight line depreciation.