Depreciation Methods Exercise (CH 9)

Scenario:
Bills Pizzas purchased a small delivery truck on January 1, 2012.
Cost
$13,000
Expected salvage value
$1,000
Estimated useful life (in years) 5
Estimated useful life (in miles) 100,000
Straight-line method: (Cost Salvage Value) / Useful life = Annual Depreciation Expense
Year of
Annual Depreciation
Accumulated Depreciation
Trucks Book Value
service
Expense
Balance
(Cost AD)
Year 1 (2012)
$2,400
$2,400
$10,600
Year 2 (2013)
$2,400
$4,800
$8,200
Year 3 (2014)
$2,400
$7,200
$5,800
Year 4 (2015)
$2,400
$9,600
$3,400
Year 5 (2016)
$2,400
$12,000
$1,000
Double-declining balance method: (Book Value x Twice the straight-line annual rate)
Year of
Trucks Book Depreciation Rate Depreciation for
Accumulated Depreciation
service
Value
(Twice the
the year
Balance
(Cost AD)
Straight Line Rate)
(Beginning Book
Value x 40%)
Year 1
$13,000
20% x 2 = 40%
$5,200
$5,200
(2012)
Year 2
$7,800
40%
$3,120
$8,320
(2013)
Year 3
$4,680
40%
$1,872
$10,192
(2014)
Year 4
$2,808
40%
$1,123
$11,315
(2015)
Year 5
$1,685
40%
$685*
$12,000
(2016)
* $1,685 - $1,000 = $685 This is the remaining amount of depreciation claimed in the final year in order
to leave the Book Value equal to the $1,000 Salvage Value at the end of five years.
Units-of-activity method:
Year of
Units of Activity Depreciation for
Accumulated
Trucks Book Value
service
(Actual miles
the year
Depreciation Balance
(Cost AD)
driven)
(miles x $0.12)
Year 1 (2012)
15,000
$1,800
$1,800
$11,200
Year 2 (2013)
30,000
$3,600
$5,400
$7,600
Year 3 (2014)
20,000
$2,400
$7,800
$5,200
Year 4 (2015)
25,000
$3,000
$10,800
$2,200
Year 5 (2016)
10,000
$1,200*
$12,000
$1,000
(Cost Salvage Value) / Lifetime Usage Estimate = ($13,000 - $1,000)/100,000 miles = $0.12/mile

Revising Depreciation:
Bill's Pizzas decides at the end of 2015 (prior to the year-end adjusting entries) to extend the estimated
useful life of the truck one year (a total life of six years) and increase its salvage value to $2,200.
The company has used the straight-line method to depreciate the asset to date. What is the new revised
annual depreciation amount for the truck?
Year of
service
Year 1 (2012)
Year 2 (2013)
Year 3 (2014)

Depreciation for the

year
$2,400
$2,400
$2,400

Accumulated Depreciation
Balance
$2,400
$4,800
$7,200

Book value 1/1/2015

$5,800

Less: New salvage value

$2,200

New Depreciable cost

$3,600

Remaining useful life

3 years (2015, 2016, 2017)

Revised annual depreciation

($3,600 / 3) = $1,200

Trucks Book Value

(Cost AD)
$10,600
$8,200
$5,800