Ayayai Company purchased a new plant asset on April 1 2017 a

Ayayai Company purchased a new plant asset on April 1, 2017, at a cost of $810,540. It was estimated to have a service life of 20 years and a salvage value of $68,400. Ayayai’s accounting period is the calendar year.

Ayayai Company purchased a new plant asset on April 1, 2017, at a cost of $810,540. It was estimated to have a service life of 20 years and a salvage value of $68,400. Ayayai’s accounting period is the calendar year.

Solution

Answer

Total Cost of the Truck = $810,540

Salvage Value = $68,400

Useful Life = 20Years

Sum of the Year digit Method

Depreciable Value = $742,140 (810,540 – 68,400)

Depreciation = Fraction * Depreciable Value

Sum of Digits = (20 + 19 + 18 + … + 2 + 1) = 210

Depreciation for first year

9 months i.e. from April to December

= 20/210 * 9/12 months * $742,140

Depreciation for first year = $53,010

Depreciation for Second year

3 months of first year (i.e. from Jan,18 to April,18) + 9 Months of Second Year (April,18 to December,18)

= (20/210 * 3/12 months * $742,140) + (19/210 * 9/12 months * $742,140)

= $17,670 + $50,359.5

Depreciation for Second year= $68,030

Double Declining Balance

Straight line depreciation rate = 1/useful life

= 1/20 years

= 5%

Depreciation rate = 2 * Straight line depreciation rate

= 2 * 5%

Depreciation rate = 10%

Depreciation = Book Value * Depreciation Rate

Depreciation for first year

Book value at starting of first year = 810,540

Depreciation = 810,540 * 10% * 9/12 months

Depreciation for first year = $60,791

Depreciation for Second year

Book value at starting of Second year = $749,749.5 (810,540 - 60,790.5)

Depreciation = 749,749.5 * 10%

Depreciation for Second year = $74,975