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Lance's Truck Stop purchased a new automatic truck washing machine for $135,000 on January 1. Lance estimates that the machine will last for 10 years at which time it can be sold for $35,000. Lance also estimates that a total of 50,000 trucks would be washed by the machine before it was salvaged. During the first year 7,000 trucks were washed and during the second year another 9,000 were washed. REQUIRED: Calculate depreciation expense for the first two years using the straight-line, units of production, and double declining-balance methods.

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Answer:

Results are below.

Explanation:

First, we need to calculate the annual depreciation using the straight-line method:

Annual depreciation= (original cost - salvage value)/estimated life (years)

Annual depreciation= (135,000 - 35,000) / 10

Annual depreciation=  $10,000 per year

Now, using the double-declining balance:

Annual depreciation= 2*[(book value)/estimated life (years)]

Year 1:

Annual depreciation= 2*[(135,000 - 35,000) / 10]

Annual depreciation= $20,000

Year 2:

Annual depreciation= 2*[(100,000 - 20,000) / 10]

Annual depreciation= $16,000

Finally, using the units of production method:

Annual depreciation= [(original cost - salvage value)/useful life of production in trucks washed]*trucks washed

Year 1:

Annual depreciation= [100,000 / 50,000]*7,000

Annual depreciation= $14,000

Year 2:

Annual depreciation= 2*9,000

Annual depreciation= $18,000