Red Enterprises purchased a vehicle for $35 000.A further $5000 was spent to prepare it for use.The useful life of the vehicle is expected to be 15 years,but Red Enterprises expects to replace it with a better model in 7 years' time.The salvage value is estimated to be $6500 after 15 years and $15 000 at the end of 7 years.What is the depreciation for the first 2 years using the declining-balance method of depreciation (rounded to the nearest dollar)?

Question

Quizplus · Accepted Answer

The declining-balance method of depreciation involves calculating depreciation based on a constant rate applied to the declining book value of the asset each year. Since the expected replacement time is 7 years, we use this for the depreciation calculation. The initial cost is $35,000 + $5,000 for preparation = $40,000. The salvage value at the end of 7 years is $15,000. The depreciation rate is double the straight-line rate, which would be 2/7 (about 28.57%) per year. For Year 1, the depreciation is 28.57% of $40,000 = $11,428. For Year 2, it's 28.57% of the new book value ($40,000 - $11,428) = $8,163. Rounded to the nearest dollar, the choices provided do not directly match these calculations, suggesting a possible misunderstanding in the application of the declining balance method or an error in the question's provided choices. However, based on the method described, none of the provided choices accurately reflect the correct depreciation amounts for the first 2 years using the standard declining-balance method calculation.

Red Enterprises Purchased a Vehicle for $35 000