Delaney purchased a used van for use in its business on January 1, 2017. It paid $ 16,000 for the van. Delaney expects the van to have a useful life of four years, with an estimated residual value of $ 1, 300. Delaney expects to drive the van 35,000 miles during 2017, 18,000 miles during 2018, 15,000 miles in 2019, and 37,000 miles in 2020, for total expected miles of 105,000.
Using the double-declining-balance method of depreciation, calculate the following amounts for the van for each of the four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
There are three major methods used to compute depreciation. Generally, each method computes a different amount of depreciation expense for each year, but the total depreciation over the life of the asset for all three methods will be the same. Residual values are not depreciated since the company expects to collect that amount at the end of the useful life. The depreciable basis of an asset is the cost less the residual value.
The double-declining-balance (DDB) method is an accelerated method of depreciation in which more depreciation expense is taken in the beginning years of an asset's life. This assumes that an asset is more productive, and producing more revenue, in the beginning years. This method computes annual depreciation by multiplying the asset's declining book value by a constant percentage, which is two times the straight-line depreciation rate. DDB amounts are computed as follows:
1. Compute the straight-line depreciation rate per year. A truck with a 5-year useful life has a straight-line depreciation rate of 1/5, or 20%, each year. An asset with a 10-year useful life has a straight-line depreciation rate of 1/10, or 10%, and so on.
2. Multiply the straight-line rate by 2 to compute the DDB rate. For a 5-year asset, the DDB rate is 40% (20% x 2). A 10-year asset has a DDB rate of 20% (10% x 2).
3. Multiply the DDB rate by the period's beginning asset book value (cost less accumulated depreciation). Under the DDB method, ignore the residual value of the asset in computing depreciation, except during the last year.
4. Determine the final year's depreciation amount, that is, the amount needed to reduce the asset's book value to its residual value. The residual value should not be depreciated but should remain on the books until the asset is disposed of.
First, let's calculate the double-declining rate. (Round your final answer to two decimal places.)
Using the double-declining-balance method of depreciation, calculate the following amounts for the van for each of the four years of its expected life:
a. Depreciation expense
b. Accumulated depreciation balance
c. Book value
There are three major methods used to compute depreciation. Generally, each method computes a different amount of depreciation expense for each year, but the total depreciation over the life of the asset for all three methods will be the same. Residual values are not depreciated since the company expects to collect that amount at the end of the useful life. The depreciable basis of an asset is the cost less the residual value.
The double-declining-balance (DDB) method is an accelerated method of depreciation in which more depreciation expense is taken in the beginning years of an asset's life. This assumes that an asset is more productive, and producing more revenue, in the beginning years. This method computes annual depreciation by multiplying the asset's declining book value by a constant percentage, which is two times the straight-line depreciation rate. DDB amounts are computed as follows:
1. Compute the straight-line depreciation rate per year. A truck with a 5-year useful life has a straight-line depreciation rate of 1/5, or 20%, each year. An asset with a 10-year useful life has a straight-line depreciation rate of 1/10, or 10%, and so on.
2. Multiply the straight-line rate by 2 to compute the DDB rate. For a 5-year asset, the DDB rate is 40% (20% x 2). A 10-year asset has a DDB rate of 20% (10% x 2).
3. Multiply the DDB rate by the period's beginning asset book value (cost less accumulated depreciation). Under the DDB method, ignore the residual value of the asset in computing depreciation, except during the last year.
4. Determine the final year's depreciation amount, that is, the amount needed to reduce the asset's book value to its residual value. The residual value should not be depreciated but should remain on the books until the asset is disposed of.
First, let's calculate the double-declining rate. (Round your final answer to two decimal places.)
Now, calculate the double-declining depreciation expense for 2017. Since this is the first year the asset has been in service, the book value will be equal to the asset's cost.
Complete the table to show the depreciation expense, accumulated depreciation, and book value of the van for the remainder of its expected life. Remember, the depreciation expense in the final year must bring the final book value to the asset's residual value.
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