Maximus Dog Company purchased a new supply van on January 1, 2011, for $35,000. The van is estimated to last for five years and will then be sold, at which time it should be worth approximately $5,000. The company uses straight- line depreciation and has a fiscal year end of December 31.
1. How much depreciation expense will be shown on the income statement for the year ended December 31, 2011?
2. What is the book value (also called carrying value) of the van on the balance sheet for each of the five years beginning with December 31, 2011?
To answer these questions, we need to understand the concept of straight-line depreciation. Straight-line depreciation is a method used to allocate the cost of an asset evenly over its useful life.
1. To calculate the depreciation expense for the year ended December 31, 2011, we need to determine the annual depreciation amount. This can be calculated using the formula:
Annual Depreciation = (Cost of Asset - Residual Value) / Useful Life
In this case, the cost of the van is $35,000, the residual value is $5,000, and the useful life is 5 years.
Annual Depreciation = ($35,000 - $5,000) / 5
Annual Depreciation = $6,000
Therefore, the depreciation expense shown on the income statement for the year ended December 31, 2011, will be $6,000.
2. To calculate the book value (or carrying value) of the van on the balance sheet for each of the five years, we need to subtract the accumulated depreciation from the initial cost.
Year 1:
Book Value = Cost of Asset - Accumulated Depreciation
Book Value = $35,000 - $6,000
Book Value = $29,000
Year 2:
Book Value = Cost of Asset - Accumulated Depreciation
Book Value = $35,000 - ($6,000 * 2)
Book Value = $35,000 - $12,000
Book Value = $23,000
Similarly, you can calculate the book value for the remaining years as follows:
Year 3:
Book Value = $35,000 - ($6,000 * 3)
Book Value = $35,000 - $18,000
Book Value = $17,000
Year 4:
Book Value = $35,000 - ($6,000 * 4)
Book Value = $35,000 - $24,000
Book Value = $11,000
Year 5:
Book Value = $35,000 - ($6,000 * 5)
Book Value = $35,000 - $30,000
Book Value = $5,000
Therefore, the book value (or carrying value) of the van on the balance sheet for each of the five years would be $29,000, $23,000, $17,000, $11,000, and $5,000 respectively.