Question

M. C. Jones purchased a truck for $30,500 to be used in his business. He is considering depreci-ating the truck by two methods: units-of-output (assuming total miles to be driven of 80,000) and double-declining-balance (assuming a 5-year useful life). The truck is expected to be sold for approx-imately $6,500 at the end of its useful life. Prepare a comparison of the first year’s depreciation expense that would be recognized by Jones under these methods, assuming the truck was actually driven 10,000 miles in the first year. Briefly state why the difference between the two is so great

Answer 1

Comparing units-of-output and double-declining-balance depreciation methods for a $30,500 truck driven 10,000 miles in its first year results in $3,000 and $9,600 in depreciation expense respectively. The vast difference is due to the accelerated nature of the double-declining-balance method.

Step-by-step explanation:

M. C. Jones is considering two different methods for depreciating his $30,500 truck for business use - units-of-output and double-declining-balance. Given the truck will have a salvage value of $6,500 after an 80,000-mile usage or a 5-year useful life, the depreciation expense calculations would vary significantly between these methods in the first year, especially if the truck was driven 10,000 miles.

Under the units-of-output method, the depreciation expense is calculated based on the actual use of the truck. If we assume the total mileage is 80,000 miles, then the cost per mile is ($30,500 - $6,500) / 80,000 miles = $0.30 per mile. Since the truck was driven 10,000 miles in the first year, the depreciation expense would be 10,000 miles * $0.30 per mile = $3,000.

Meanwhile, the double-declining-balance method accelerates the depreciation early in the asset's life. This method would take the book value at the beginning of the year ($30,500), subtract the salvage value ($6,500), leaving us with a depreciable base of $24,000. The depreciation rate is 2 / 5 years = 40% per year. Thus, in the first year, the depreciation expense would be 40% * $24,000 = $9,600.

The difference between the two methods is $6,600 ($9,600 - $3,000), which is attributable to the accelerated nature of the double-declining-balance method that front-loads the depreciation expenses compared to the units-of-output method that spreads the expense based on actual usage.