# Calculations for various depredation methods. On January 1, 2008, Luck Delivery Company acquired a new truck for

## Question:

a. The straight-line method.

b. The declining-balance method at twice the straight-line rate, with a switch to straight- line in 2011. The declining balance method multiplies the book value (that is, acquisition cost minus accumulated depreciation) of the asset by a depredation rate. A depredation rate of twice the straight-line rate equals 2/n, or 2/5 in this case. Because a firm will never fully depreciate an asset using the declining-balance method, firms switch to the straight-line method at some time prior to the end of an asset’s useful life, 2011 in this case.

c. The sum-of-the-years’-digits method. The sum-of-the-years’-digits method begins by summing the digits of an asset’s useful life. The sum for a five-year asset is 15 (= 5 + 4 + 3 + 2 + 1). The depreciation rate for the first year of useful Life is 5/15, for the second year is 4/15, and so forth. The depreciation base is the same as for the straight-line method, acquisition cost minus salvage value. Multiplying the depreciation base by the depreciation rate yields the amount of depredation for each year.

d. The truck belongs to a category of property for tax purposes requiring the following proportions of the asset’s cost to be depreciated each year: 0.20, 0.32, 0.192, 0.115, 0.115, 0.058. The tax law allows firms to ignore salvage value in calculating depreciation.

Salvage Value

Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...

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**Related Book For**

## Financial Accounting an introduction to concepts, methods and uses

**ISBN:** 978-0324789003

13th Edition

**Authors:** Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis