Question

Speedy Delivery Company purchases a delivery van for $28,000. Speedy estimates that at the end of its four-year service life, the van will be worth $4,000. During the four-year period, the company expects to drive the van 120,000 miles.

Actual miles driven each year were 28,000 miles in year 1; 32,000 miles in year 2; 20,000 miles in year 3; and 24,000 miles in year 4. Note that actual total miles of 104,000 exceed expectations by 4,000 miles



Required:

Calculate annual depreciation for the four-year life of the van using each of the following methods.

Answer 1

To calculate annual depreciation for the van, three methods are used: straight-line, units of production, and double declining balance. For straight-line, the annual amount is $6,000. Units of production varies based on mileage, and double declining balance involves a 50% yearly rate until salvage value is reached.

Step-by-step explanation:

Calculation of Depreciation Using Different Methods

To calculate the annual depreciation for the four-year life of the van using different methods, we must first establish the depreciable base, which is the cost of the van minus its salvage value. The depreciable base is $28,000 - $4,000 = $24,000.

Straight-Line Depreciation

With straight-line depreciation, the annual depreciation is the same each year. It is calculated using the formula:

Annual Depreciation = (Cost - Salvage Value) / Useful Life
$24,000 / 4 years = $6,000 per year.

Units of Production Depreciation

Units of production depreciation is based on usage. The annual depreciation is calculated as follows:

Depreciation per mile = (Cost - Salvage Value) / Total expected miles
$24,000 / 120,000 miles = $0.20 per mile.

Then, for each year, multiply the depreciation per mile by the actual miles driven that year:

Year 1: 28,000 miles x $0.20 = $5,600

Year 2: 32,000 miles x $0.20 = $6,400

Year 3: 20,000 miles x $0.20 = $4,000

Year 4: 24,000 miles x $0.20 = $4,800

Double Declining Balance Depreciation

This method accelerates the depreciation expense. The annual depreciation rate is double that of the straight-line method:

Double Declining Rate = (100% / Useful Life) x 2
50% per year (using a 4-year life).

For further calculation, the book value at the beginning of each year (excluding salvage value) should be multiplied by the double declining rate to compute the yearly depreciation amount. The depreciation stops when the book value is equal to the salvage value.