A Company purchased a new van for floral deliveries on March 31, 2021. The van cost Sh 6,800,000 with an estimated life of 10 years and Sh 1,200,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation is used and the company charges depreciation for the period the asset has been in existence. Hint: Write your answers with comma as in 1,000 not 1000. (a) The depreciable cost for the new van is Sh (b) The rate of depreciation is per cent. (c) The estimated depreciation expense for 2021 is
Question
A Company purchased a new van for floral deliveries on March 31, 2021. The van cost Sh 6,800,000 with an estimated life of 10 years and Sh 1,200,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation is used and the company charges depreciation for the period the asset has been in existence. Hint: Write your answers with comma as in 1,000 not 1000.
(a) The depreciable cost for the new van is Sh
(b) The rate of depreciation is per cent.
(c) The estimated depreciation expense for 2021 is
Solution
(a) The depreciable cost for the new van is calculated by subtracting the salvage value from the cost of the van.
Depreciable cost = Cost of the van - Salvage value Depreciable cost = Sh 6,800,000 - Sh 1,200,000 Depreciable cost = Sh 5,600,000
(b) The rate of depreciation is calculated by dividing 1 by the estimated life of the van and then multiplying by 2 (since it's double-declining-balance method).
Rate of depreciation = (1 / Estimated life of the van) * 2 Rate of depreciation = (1 / 10) * 2 Rate of depreciation = 0.2 or 20 per cent.
(c) The estimated depreciation expense for 2021 is calculated by multiplying the depreciable cost by the rate of depreciation. However, since the van was purchased on March 31, 2021, it was in use for only 9 months (April to December) in 2021. Therefore, we need to adjust the depreciation expense for the 9/12 of the year.
Depreciation expense for 2021 = Depreciable cost * Rate of depreciation * (9/12) Depreciation expense for 2021 = Sh 5,600,000 * 0.2 * (9/12) Depreciation expense for 2021 = Sh 840,000.
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