A new truck costing $60,000 with a residual value of $6,000 has an estimated useful life of five years. Using the declining-balance method at twice the straight-line rate, the depreciation expense in year 2 is:
A)$24,000
B)$14,000
C)$14,400
D)$2,400
E)None of these

Question

Quizplus · Accepted Answer

First, we need to calculate the straight-line depreciation rate:

Straight-line rate = (cost - residual value) / useful life
Straight-line rate = ($60,000 - $6,000) / 5
Straight-line rate = $54,000 / 5
Straight-line rate = $10,800 per year

Next, we need to calculate the declining-balance rate at twice the straight-line rate:

DB rate = 2 x straight-line rate
DB rate = 2 x $10,800 per year
DB rate = $21,600 per year

Using the declining-balance method, we apply this rate to the book value of the truck at the beginning of each year. In year 1, the book value is simply the cost of the truck, so the depreciation expense is:

Year 1 depreciation expense = DB rate x book value at beginning of year
Year 1 depreciation expense = $21,600 x $60,000
Year 1 depreciation expense = $1,296,000

However, we cannot expense more than the cost of the asset or its residual value, so the depreciation expense in year 1 is limited to $60,000 - $6,000 = $54,000.

To calculate the book value at the beginning of year 2, we subtract the year 1 depreciation expense from the cost of the truck:

Book value at beginning of year 2 = cost - year 1 depreciation expense
Book value at beginning of year 2 = $60,000 - $54,000
Book value at beginning of year 2 = $6,000

Finally, we apply the declining-balance rate to this book value to find the depreciation expense in year 2:

Year 2 depreciation expense = DB rate x book value at beginning of year
Year 2 depreciation expense = $21,600 x $6,000
Year 2 depreciation expense = $129,600

Again, we need to limit the depreciation expense to the cost of the asset minus its residual value, which gives:

Year 2 depreciation expense = $60,000 - $6,000 - $54,000 = $0

Therefore, the depreciation expense in year 2 is $0 under the declining-balance method at twice the straight-line rate. However, we know that the total depreciation over the five-year life of the asset must be $54,000. Since we have already recorded $54,000 in year 1, we don't need to record any additional depreciation in year 2.

A New Truck Costing $60,000 with a Residual Value of $6,000