5 Hatcher Company purchased a delivery van on July 1 of the

5. Hatcher Company purchased a delivery van on July 1 of the current year at a cost of $40,000. The van is expected to last five years and has a salvage value of $5,000. The company\'s annual accounting period ends on December 31. (2 points) 1. What is the depreciation expense for the current year, assuming the straight-line method is used? 2. What is the book value of the van at the end of the first year? (Hint. The book value of this asset at the end of the first year should be a number between $33,000 and $38,000).

Solution

Depreciation Expenses for the Year

The Depreciation of the asset –Straigh- line method

It should be calculated with total purchase value of the asset minus salvage value if any , divided by total number of expected life of an asset

If the asset is purchased in the mid of the year then depreciation shall be calculated on pro-rata basis i.e if the asset is used for 9 months then Annual Depreciation *9/12 and if 6 months then 6/12 and so

1.Calculation of annual depreciation

Asset cost =$40000

Residual Value=$5000

Expected Life=5 Years

   40000-5000/5=$7000

The asset is purchased on 1^st july so we need to take pro-rata basis i.e 6 months only

Therefore Depreciation expense   =$7000*6/12=3500

2.Book Value of the asset at the end of year

Asset                                     40000

Accumulated depreciation 3500

Asset value at the end of year=$36500