Chubbyville purchases a delivery van for $23,500. Chubbyville estimates a four-year service life and a residual value of $2,100. During the four-year period, the company expects to drive the van 106,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods.

a. Straight line.
b. Double-declining-balance.
c. Activity-based. Actual miles driven each year were 24,000 miles in Year 1 ; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.

Straight-line method: $5,350 yearly depreciation expense for 4 years
Double-declining method: Year 1 - $11,750, Year 2 - $5,875, Year 3 - $2,938, Year 4 - $837

Activity-based method: Year 1 - $4,845, Year 2 - $5,249, Year 3 - $4,442, Year 4 - $5,047

Explanation:

(A) Under straight-line method, depreciation expense is (cost - residual value) / Estimated useful life = ($23,500 - $2,100) / 4 years = $5,350 yearly depreciation expense.

Accumulated depreciation for 4 years is $5,350 x 4 years is $21,400.

(B) The double-declining method is otherwise known as the reducing balance method and is given by the formula below:

Double declining method = 2 X SLDP X BV

SLDP = straight-line depreciation percentage

BV = Book value

SLDP is 100%/4 years = 25%, then 25% multiplied by 2 to give 50% or 1/2

At Year 1, 50% X $23,500 = $11,750

At Year 2, 50% X $11,750 ($23,500 - $11,750) = $5,875

At Year 3, 50% X $5,875 ($11,750 - $5,875) = $2,938

The depreciation for Year 4 $1,469 [50% X ($5,875 - $2,938)] will decrease the book value of the asset below its salvage value $2,100. Depreciation will only be allowed up to the point where the book value = salvage value. Consequently the depreciation for Year 4 will be $837.

Accumulated depreciation for 4 years is $11,750 + $5,875 + $2,938 + $837 = $21,400.

(C) The activity-based method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:

(Original Cost - Salvage value) / Estimated production capacity x Units/year

At Year 1, depreciation expense (DE) is: ($23,500 - $2,100) / 106,000 miles x 24,000 miles = $4,845

At Year 2, depreciation expense (DE) is: ($23,500 - $2,100) / 106,000 miles x 26,000 miles = $5,249

At Year 3, depreciation expense (DE) is: ($23,500 - $2,100) / 106,000 miles x 22,000 miles = $4,442

At Year 4, depreciation expense (DE) is: ($23,500 - $2,100) / 106,000 miles x 25,000 miles = $5,047

Accumulated depreciation for 4 years is $4,845 + $5,249 + $4,442 + $5,047 = $19,583.

Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in Year 2.

The 8,000 miles fallen short expectation can be recognized as a loss.