Question

Wexford Co.

Wexford Co. purchased a new delivery truck at the beginning of 2016. The truck has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in 2016. The truck was driven 20,000 miles during 2016 and 24,000 miles during 2017. The number of expected miles over five years is 100,000.
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Wexford Co. wants to use the depreciation method that will result in the highest depreciation expense for 2016. Which method should be used?

a. straight-line
b. double-declining-balance
c. units-of-production
d. all methods create the same income in 2016

Answer 1

The b) double-declining-balance method will result in the highest depreciation expense for 2016.

Step-by-step explanation:

The method that will result in the highest depreciation expense for 2016 is the double-declining-balance method. This method is an accelerated depreciation method, which means that it will allocate a higher proportion of the depreciation expense to the earlier years of the truck's life.

The double-declining-balance method calculates depreciation by taking twice the straight-line rate and applying it to the book value of the asset. In this case, the straight-line rate is 1/5 or 20%, so the double-declining-balance rate is 40%. Therefore, the depreciation expense for 2016 would be $14,800 ($37,000 x 40%).

The straight-line method, on the other hand, allocates the same amount of depreciation expense over the useful life of the asset. The units-of-production method allocates depreciation based on the actual usage or production of the asset. In this case, since the mileage driven in 2016 is 20,000 miles, the depreciation expense using the units-of-production method would be ($37,000 - $7,000) x (20,000/100,000) = $6,000.