Exercise 1. Calculating the Four Depreciation Methods: Depreciation Data: A truck (MACHINERY AND EQUIPMENT) is acquired at 1/1 Year 7 for a cost of $68,000. Estimated useful life at 1/1 Year 7 is 5 years. At 1/1 Year 7 the residual value is estimated to be $8,000 at the end of the 5-year useful life, i.e., 12/31 Year 12. The abbreviation for residual value is "RV." Estimated total miles (units) over the truck's life is 200,000 miles. Actual usage each year over the truck's life (which will not be known until after each year has passed): Year 1: 50,000 miles Year 2: 44,000 miles Year 3: 36,000 miles Year 4: 40,000 miles Year 5: 30,000 miles Total 200,000 miles Below, the amount of DEPRECIATION EXPENSE and related amounts are calculated for each of the four depreciation methods for each year of the truck's useful life. a. Straight-Line Method (SL): ( Cost - Residual Value DEPRECIATION Life = EXPENSE b. Units-of-Production Method (UOP): DEPRECIATION = ( Cost - RATE Residual Value ) Total Units (Miles) ) Depreciation Expense for Each Year: Actual Miles Year Per Year Cost Depreci- ation Rate = DEPR. EXPENSE ACCUM. DEPR. Book Value $ 68,000 1 miles X $ = $ $ 2 miles X $ = $ $ $ 3 miles X $ = $ $ 4 miles X $ = $ 5 miles X $ = * $ A A A A $ Total = $ 60,000* *The total depreciation must equal the cost - residual value, $60,000. c. Double-Declining-Balance Method (DDB): Double-Declining Rate = (100% useful life) X 2 = (100% )X2 = %. Double- Year Declining Rate Declining DEPR. ACCUM. Book Value = EXPENSE DEPR. Book Value Cost $ 68,000 1 % $ $ S $ 2 % S S $ 3 % $ $ $ $ **4 % $ $ $ 5 Plug Amount Total $ $ $ = $ 60,000* *The total depreciation must equal the cost-residual value, $60,000. Under the double-declining balance method a plug amount is often needed for the last year since this process is subject to rounding. ** Round depreciation expense to the nearest whole dollar. d. Sum-Of-The-Years'-Digits Method (SYD): N = useful life of the asset = 5 years. Cost Residual Value == $ - $ = $ Denominator = N ( N +1) 2 +1)/2 = Numerator/ DEPR. ACCUM. Year Denominator Cost-RV = EXPENSE DEPR. Cost $ 1 $ S $ S 2 $ $ $ $ 3 $ $ $ 4 $ = $ S $ 5 S = $ $ $ Total = $ 60,000* *The total depreciation must equal the cost - residual value, $60,000. Book Value 68,000