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9 February, 13:42

On January 1, Year 1 Missouri Co. purchased a truck that cost $49,000. The truck had an expected useful life of 10 years and a $5,000 salvage value. Missouri uses the double declining-balance method. What is the amount of depreciation expense recognized in Year 2?

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  1. 9 February, 16:26
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    The amount of depreciation expense recognized in Year 2 = $7,800.

    Explanation:

    Determine the depreciation base

    The depreciation base = Acquisition cost - Residual/Salvage value.

    The depreciation base = 49,000 - 5,000

    The depreciation base = $44,000.

    Determining the depreciation rate

    The depreciation rate = depreciation base / Useful life

    The depreciation rate = 44,000/10

    The depreciation rate = $ 4,400.

    To determine depreciation % rate

    Depreciation % rate = (The depreciation rate / depreciation base) * 100

    Depreciation % rate = (4,400 / 44,000) * 100

    Depreciation % rate = 10 %

    But since Missouri Co. uses double declining balance method of depreciation, the correct depreciation % rate is 10 * 2 = 20%

    Determining the depreciation expense for year 2

    Year 2 depreciation expense is computed as follows:

    (Acquisition cost - year 1 depreciation expense) * Depreciation % rate

    Depreciation expense for year 2 is computed as:

    Acquisition cost * Depreciation % rate = 49,000 * 20%

    Year 1 depreciation expense = $9,800.

    Therefore year 2 depreciation expense = (49,000 - 9,800.) * 20%

    Therefore year 2 depreciation expense = $ 7,800.
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