Asked Aug 9, 2009, 02:35 PM
Almost done with this particular problem, just need help with part B:
Depreciation calculation methods. Hill Co. Acquired a new delivery truck at the
Beginning of its current fiscal year. The following information is available
estimated useful life 5 years
estimated salvage value $5,000
A. Calculate depreciation expense for the first 4 years of the trucks life using:
1. Straight-line depreciation.
2. Sum-of-the-years-digits depreciation.
3. Double-declining-balance depreciation.
B. Calculate the trucks net book value at the end of its third year of use under
Each depreciation method.
C. Assume that Hill Co. Had no more use for the truck after the end of the
Third year and that at the beginning of the fourth year it had an offer from a
Buyer who was willing to pay $6,200 for the truck. Should the depreciation
Method used by Hill Co. Affect the decision to sell the truck?
1. Straight-line depreciation method:
100,000 - 50000
23,750 (depreciation expense for first four years)
2. Sum-of-the-years' digits depreciation method:
4 years useful life: 4+3+2+1 = 10
4/10 = 40%, 3/10 = 30%, 2/10 = 20%, 1/10 = 10%
100,000 - 5,000 = 95,000 (depreciable base)
Year 1 @ 40% = $38,000
Year 2 @ 30% = 28,500
Year 3 @ 20% = $19,000
Year 4 @ 10% = $9,500
3. Double-declining-balance depreciation method:
Straight line depreciation charge: 23,750
Total Depreciation amount: 95,000
Divide 23,750 by 95,000
Striaght line depreciation expense is 25% of the total depreciation amount.
Figure is doubled to 50%
Year 1: 95,000 * 50% = 47,500
Year 2: 47,500 8 50% = 23,750
Year 3: 23,750 * 50% = 11,875 (drops below the amount that would be charged using straight line method)
Year 4: 11,875 * 50% = 5,937.50 (drops below the amount that would be charged using straight line method)
Comparison of all the methods:
Method Year 1 Year 2 Year 3 Year 4
Straight Line $23,750 23,750 $23,750 $23,750
Sum of Years' 38,000 28,500 $19,000 $9,500
Double-Decl Balance $47,500 23,750 $0 $0
B.Net Book Value Year Open BV Deprec. Ending BV
Straight Line Year 1 100,000
Sum of Years' Year 2 100,000
Double Declining Balance Year 3 100,000
Depreciation method not relevant to the decision to sell truck in scenario. Truck should be sold if there
Is no more use for it. Depreciation method will not affect the cash flow from the sale of the
Truck. The accounting gain or loss may be different due to depreciation methods, but sale price will not be affected.
Then again, When you look at the comparison of the methods above, Hill Co, would probably fair better
With selling the truck at one of the amounts above. $23,750 at the end of year three would certaintly be a better
Bargain than selling it for $6,200, but that decision should be based upon whether or not it's value to the company
Is even worth holding on to it and selling it at a later date.