A truck costing $25,000 with a residual value of $5,000 was purchased by Rim Corporation. The truck’s estimated life is 10 years. At the end of Year 2, what is the book value using declining-balance method? Assume a depreciation rate of twice the straight-line method.
To calculate the book value of the truck at the end of Year 2 using the declining-balance method, we need to follow these steps:
Step 1: Calculate the depreciation rate per year. Since the depreciation rate for declining-balance is twice the straight-line method, the depreciation rate would be 2 times (1 / estimated life) or (2 / 10).
Depreciation rate = 2 / 10 = 0.2 or 20%
Step 2: Calculate the depreciation expense for Year 1. To determine the depreciation expense for Year 1, we multiply the depreciation rate by the initial cost of the truck.
Depreciation expense Year 1 = Depreciation rate * Cost of truck
= 0.2 * $25,000
= $5,000
Step 3: Calculate the book value at the end of Year 1. Subtract the depreciation expense for Year 1 from the initial cost of the truck.
Book value at the end of Year 1 = Cost of truck - Depreciation expense Year 1
= $25,000 - $5,000
= $20,000
Step 4: Calculate the depreciation expense for Year 2. The depreciation expense for Year 2 will be the same as Year 1 since the rate remains the same throughout the useful life of the asset.
Depreciation expense Year 2 = Depreciation expense Year 1
= $5,000
Step 5: Calculate the book value at the end of Year 2. Subtract the depreciation expense for Year 2 from the book value at the end of Year 1.
Book value at the end of Year 2 = Book value at the end of Year 1 - Depreciation expense Year 2
= $20,000 - $5,000
= $15,000
Therefore, the book value using declining-balance method at the end of Year 2 would be $15,000.