Question

Speedy Delivery Company purchases a delivery van for $36,000. Speedy estimates that at the end of its four-year service life, the van will be worth $6,400. During the four-year period, the company expects to drive the van 148,000 miles.

Required:
Calculate annual depreciation for the first two years using each of the following methods. Round all amounts to the nearest dollar.
1. Straight-line.
2. Double-declining-balance.
3. Activity-based.

Actual miles driven each year were 40,000 miles in year 1 and 46,000 miles in year 2.

Answer 1

Straight line method

Year 1. $7,400

Year 2. $7,400

Double - Declining Balance method

Year 1= 18,000

Year 2= 9,000

Activity Based method

Year 1= 8,000

Year 2=9,200

Step-by-step explanation:

Calculation for the annual depreciation for the first two years using Straight line method for year 1 & 2

STRAIGHT LINE METHOD

Year 1 =(36,000 - 6400) / 4 year

Year 1 =29,600/4 year

Year 1= 7,400

Year 2 =(36,000 - 6400) / 4 year

Year 2 =29,600/4 year

Year 2= 7,400

Calculation for the annual depreciation for the first two years using Double - Declining Balance method

DOUBLE DECLINE BALANCE METHOD

Year 1= (2/4) x (36,000 - 0)

Year 1= (2/4) x 36,000

Year 1= 18,000

Year 2= (2/4) x (36,000 - 18,000)

Year 2= (2/4) x18,000

Year 2= 9,000

Calculation for the annual depreciation for the first two years using Activity Based method

ACTIVITY BASED METHOD

Year 1= [ (36,000 - 6,400) / (148,000) ] x (40,000 miles)

Year 1=( 29,600/148,000)×40,000 miles

Year 1=0.2×40,000 miles

Year 1= 8,000

Year 2= [ (36,000 - 6,400) / (148,000) ] x (46,000 miles)

Year 2 =(29,600/148,000)×46,000 miles

Year 2=0.2×46,000 miles

Year 2 = 9,200

Therefore the annual depreciation for the first two years is:

Straight line method

Year 1. $7,400

Year 2. $7,400

Double - Declining Balance method

Year 1= 18,000

Year 2= 9,000

Activity Based method

Year 1= 8,000

Year 2=9,200