Question

On January 1, Speedy Delivery Company purchases a delivery van for $40,800. Speedy estimates that at the end of its four-year service life, the van will be worth $5,600. During the four-year period, the company expects to drive the van 176,000 miles.

Actual miles driven each year were 45,000 miles in year 1 and 50,000 miles in year 2.
Required:
Calculate annual depreciation for the first two years using each of the following methods. (Do not round your intermediate calculations.)
1. Straight-line.
year annual depreciation
1
2
2. double declining balance
year annual depreciation
1
2
3. activity-based
year annual depreciation
1
2

Answer 1

To calculate the annual depreciation for the first two years using different methods, let's consider the information given.

1. Straight-line Method:
To calculate annual depreciation using the straight-line method, we need to determine the depreciation expense per year. The formula for straight-line depreciation is:

Depreciation expense = (Initial cost - Salvage value) / Useful life

Given that the initial cost is $40,800, the salvage value is $5,600, and the useful life is four years, we can calculate the annual depreciation as follows:

Depreciation expense = ($40,800 - $5,600) / 4 = $8,300 per year

So, for year 1, the annual depreciation would be $8,300, and for year 2, it would also be $8,300.

2. Double Declining Balance Method:
To calculate annual depreciation using the double declining balance method, we need to determine the depreciation rate and apply it to the remaining book value each year. The formula for double declining balance depreciation is:

Depreciation expense = (Book value at the beginning of the year) x (Depreciation rate)

The depreciation rate is twice the straight-line rate. Therefore, the straight-line rate is 1/4 or 25%. The double declining balance rate is 2 times that, which is 50%.

For year 1:
Depreciation expense = ($40,800 - 0) x 50% = $20,400

For year 2:
Book value at the beginning of year 2 = ($40,800 - $20,400) = $20,400
Depreciation expense = ($20,400 - 0) x 50% = $10,200

3. Activity-based Method:
To calculate annual depreciation using the activity-based method, we need to determine the depreciation rate per mile and multiply it by the actual miles driven each year.

Depreciation rate per mile = (Initial cost - Salvage value) / Total estimated miles
Depreciation expense = Depreciation rate per mile x Actual miles driven

Given that the total estimated miles are 176,000, we can calculate the depreciation rate per mile as follows:

Depreciation rate per mile = ($40,800 - $5,600) / 176,000 = $0.2 per mile

For year 1:
Depreciation expense = $0.2 x 45,000 miles = $9,000

For year 2:
Depreciation expense = $0.2 x 50,000 miles = $10,000

In conclusion:
- Using the straight-line method, the annual depreciation for both year 1 and year 2 is $8,300.
- Using the double declining balance method, the annual depreciation for year 1 is $20,400, and for year 2 is $10,200.
- Using the activity-based method, the annual depreciation for year 1 is $9,000, and for year 2 is $10,000.

Please let me know if there is anything else I can help you with.