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Use the following information to answer the next two questions. Downey Company bought a delivery truck for $62,000 on January 1, 2015. They installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In addition, Downey paid $2,400 for a one-year insurance policy. They estimate the useful life of the truck to be 10 years and its residual value to be $8,000. If Downey uses the straight-line method of depreciation, what is the depreciation expense for 2016 and book value at the end of 2016

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Answer and Explanation:

The computation of the depreciation expense and book value at the end of 2016 is shown below:

But before that first determine the cost of the asset which is

Cost of the asset is

= Purchase price + rear hydraulic  lift + sales tax

= $62,000 + $8,000 + $3,000

= $73,000

Now the depreciation expense is

= ($73,000 - $8,000) ÷ (10 years)

= $6,500

ANd, the book value is

= $73,000 - $6,500 × 2

= $60,000

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