Question

2. The La Salle Bus Company has decided to purchase a new bus for $95,000 with a trade-in of their old bus. The old bus has a BV of $10,000 at the time of the trade-in. The new bus will be kept for 10 years before being sold. Its estimated SV at that time is expected to be $15,000.

a. Determine which asset class of the bus.
b. Determine annual Straight-Line Depreciation charge.

Answer 1

The straight-line depreciation for the bus would be calculated as follows:

1. Cost of the asset: $95,000
2. Cost of the asset – Estimated salvage value: $95,000 – $15,000 = $80,000 total depreciable cost
3. Useful life of the asset: 10 years
4. Divide step (2) by step (3): $80,000 / 10 years = $8,000 annual depreciation amount

Therefore, La Salle Bus Company would depreciate the bus at the amount of $8,000 annually for 10 years.

The depreciation rate can also be calculated if the annual depreciation amount is known. The depreciation rate is the annual depreciation amount / total depreciable cost. In this case, the machine has a straight-line depreciation rate of $8,000 / $80,000 = 10%.

YEAR	BOOK VALUE (BEGINNING OF YEAR)	DEPRECIATION	BOOK VALUE (END OF THE YEAR)
1	$95,000	$8,000	$87,000
2	$87,000	$8,000	$79,000
3	$79,000	$8,000	$71,000
4	$71,000	$8,000	$63,000
5	$63,000	$8,000	$55,000
6	$55,000	$8,000	$47,000
7	$47,000	$8,000	$39,000
8	$39,000	$8,000	$31,000
9	$31,000	$8,000	$23,000
10	$23,000	$8,000	$15,000

Note how the book value of the bus at the end of year 10 is the same as the salvage value. Over the useful life of an asset, the value of an asset should depreciate to its salvage value.