Question

Marika Katz, owner of Katz Ice Cream, is discussing with her accountant which method of depreciation would be best for her ice cream truck. The cost of the truck was $17,000 with an estimated life of four years. The residual value of the truck is $2,000. Marika wants you to prepare a depreciation schedule using the declining-balance method at twice the straight-line rate.

Answer 1

Cost of truck = 17000, Useful life in years = 4 , Residual value = 2000

Total depreciable amount over useful life of truck = Cost of truck - Residual value = 17000 - 2000 = 15000

Depreciation under straight line method = (Cost of truck - Residual value) / Useful life = (17000 - 2000) / 4 = 15000 / 4 = 3750

Straight line rate for depreciation = Depreciation under straight line method / Total depreciable amount over useful life of truck = 3750 / 15000 = 25%

Rate under declining balance method at twice the straight line rate = 2 x straight line rate = 2 x 25% = 50%

In this question, Depreciation for a year = 50% x beginning book value of a year

Ending book value of a year = Beginning book value of a year - Depreciation for a year

Beginning book value of year = Ending book value of previous year

For year 1, Beginning book value = Cost of truck = 17000, Depreciation = 50% x 17000 = 8500, Ending book value = 17000 - 8500 = 8500

For year 2, Beginning book value = 8500, Depreciation = 50% x 8500 = 4250, Ending book value = 8500 - 4250 = 4250

For year 3 , Beginning book value = 4250 , Depreciation = 50% x 4250 = 2125, Ending book value = 4250 - 2125 = 2125

For year 4 Beginning book value = 2125, In the 4th year depreciation = Residual value - Beginning book value of year 4. This is done to make ending book value in year 4 equal to residual value, Depreciation = 2125 - 2000 = 125, Ending book value = 2125 - 125 = 2000

We get the following depreciation schedule

Year	Beginning Book Value	Depreciation	Ending Book Value
1	17000	8500	8500
2	8500	4250	4250
3	4250	2125	2125
4	2125	125	2000