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 with a depreciation rate of twice the straight-line method, follow these steps:
Step 1: Determine the depreciation rate
The declining-balance method with a depreciation rate of twice the straight-line method means that the depreciation each year will be twice the straight-line method depreciation. Since the truck has an estimated life of 10 years, the straight-line depreciation rate can be calculated as 1 divided by the estimated life, which is 1/10 or 10%.
To find the depreciation rate for the declining-balance method, multiply the straight-line depreciation rate by 2. In this case, the depreciation rate is 10% * 2, which equals 20%.
Step 2: Calculate the depreciation for Year 1
To find the depreciation for Year 1, multiply the depreciation rate by the initial cost of the truck. The initial cost of the truck is $25,000, so the depreciation for Year 1 = $25,000 * 20% = $5,000.
Step 3: Calculate the book value at the end of Year 1
To find the book value at the end of Year 1, subtract the depreciation for Year 1 from the initial cost of the truck. The book value at the end of Year 1 = $25,000 - $5,000 = $20,000.
Step 4: Calculate the depreciation for Year 2
To find the depreciation for Year 2, multiply the depreciation rate by the book value at the end of Year 1. The book value at the end of Year 1 is $20,000, so the depreciation for Year 2 = $20,000 * 20% = $4,000.
Step 5: Calculate the book value at the end of Year 2
To find the book value at the end of Year 2, subtract the depreciation for Year 2 from the book value at the end of Year 1. The book value at the end of Year 2 = $20,000 - $4,000 = $16,000.
Therefore, the book value of the truck at the end of Year 2 using the declining-balance method with a depreciation rate of twice the straight-line method is $16,000.