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 euro)?

Question

Quizplus · Accepted Answer

The declining-balance method uses a constant rate of depreciation applied to the book value at the beginning of each year. The rate is calculated as 1 - (salvage value/original cost)^(1/useful life). Using the 7-year replacement plan and €15,000 salvage value, the rate is approximately 14.94%. Applying this rate, Year 1 depreciation is €5230 and Year 2 is €4546.

Red Enterprises Purchased a Vehicle for €35 000