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.
Question
On January 1, Speedy Delivery Company purchases a delivery van for 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.
Solution
The two most common methods for calculating depreciation are the straight-line method and the units-of-production method.
- Straight-Line Method:
The straight-line method calculates depreciation by subtracting the residual value from the cost of the asset and then dividing by the useful life of the asset.
Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life
For the first two years, the calculation would be:
Depreciation Expense = (5,600) / 4 = $8,800 per year
So, the annual depreciation for the first two years using the straight-line method is $8,800 each year.
- Units-of-Production Method:
The units-of-production method calculates depreciation based on the actual usage of the asset. In this case, the usage is measured in miles driven.
Depreciation Expense = (Cost of Asset - Residual Value) / Total Estimated Miles * Actual Miles Driven
For the first year, the calculation would be:
Depreciation Expense = (5,600) / 176,000 miles * 45,000 miles = $9,000
For the second year, the calculation would be:
Depreciation Expense = (5,600) / 176,000 miles * 50,000 miles = $10,000
So, the annual depreciation for the first year using the units-of-production method is 10,000.
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