Baker Company purchases a new delivery truck for $20,000. The truck is expected to have a useful life of 90,000 miles before replacement, and a salvage value of $2,000. In its first year the truck was driven 22,000 miles, and a further 19,000 miles in year two. What is the depreciation expense and book value at the end of year two? (Points: 5)
To calculate the depreciation expense and book value at the end of year two, we need to use the straight-line method of depreciation.
The straight-line method calculates depreciation by subtracting the salvage value from the initial cost and dividing it by the useful life in terms of miles.
Depreciation Expense = (Initial Cost - Salvage Value) / Useful Life
Let's calculate the depreciation expense for the truck:
Depreciation Expense = ($20,000 - $2,000) / 90,000 miles
Depreciation Expense = $18,000 / 90,000 miles
Depreciation Expense = $0.20 per mile
Now, let's calculate the depreciation expense for each year:
Year 1: Depreciation Expense = $0.20 per mile x 22,000 miles = $4,400
Year 2: Depreciation Expense = $0.20 per mile x 19,000 miles = $3,800
To calculate the book value at the end of year two, subtract the total depreciation expense from the initial cost of the truck:
Book Value = Initial Cost - Total Depreciation Expense
Total Depreciation Expense = Depreciation Expense Year 1 + Depreciation Expense Year 2
Total Depreciation Expense = $4,400 + $3,800 = $8,200
Book Value = $20,000 - $8,200 = $11,800
Therefore, the depreciation expense at the end of year two is $3,800 and the book value at the end of year two is $11,800.