calculations for various depredation methods on january 1 2008 252089

Calculations for various depredation methods. On January 1, 2008, Luck Delivery Company acquired a new truck for $30,000. It estimated the truck to have a useful life of five years and no salvage value. The company closes its books annually on December 31. Indicate the amount of the depreciation charge for each year of the asset’s life under the following methods:

a. The straight-line method.

b. The declining-balance method at twice the straight-line rate, with a switch to straight- line in 2011. The declining balance method multiplies the book value (that is, acquisition cost minus accumulated depreciation) of the asset by a depredation rate. A depredation rate of twice the straight-line rate equals 2/n, or 2/5 in this case. Because a firm will never fully depreciate an asset using the declining-balance method, firms switch to the straight-line method at some time prior to the end of an asset’s useful life, 2011 in this case.

c. The sum-of-the-years’-digits method. The sum-of-the-years’-digits method begins by summing the digits of an asset’s useful life. The sum for a five-year asset is 15 (= 5 + 4 + 3 + 2 + 1). The depreciation rate for the first year of useful Life is 5/15, for the second year is 4/15, and so forth. The depreciation base is the same as for the straight-line method, acquisition cost minus salvage value. Multiplying the depreciation base by the depreciation rate yields the amount of depredation for each year.

d. The truck belongs to a category of property for tax purposes requiring the following proportions of the asset’s cost to be depreciated each year: 0.20, 0.32, 0.192, 0.115, 0.115, 0.058. The tax law allows firms to ignore salvage value in calculating depreciation.

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