Calculating Depreciation
A firm has a delivery truck that originally cost $55,000 with an estimated salvage value of $5,000 and an estimated life of 10 years. During the first two years, the firm used sum-of-the-years’ digits (SYD) depreciation. At the beginning of the third year, straight-line (SL) depreciation was adopted.
Required
a. Calculate the depreciation expense during the first two years under each method.
b. What would have been the effect, before taxes, on the accounting equation if SL had been used during the first two years instead of SYD?
c. Describe the general principle that must be followed to account for the difference.
d. What is the depreciation expense that will be shown in the third and each subsequent year, using SL?
e. How would the financial statements be affected if a retroactive adjustment were the appropriate treatment? Does this difference seem important? Why?
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