Gordon Chemicals Company acquires a delivery truck at a cost of $39,700 on January 1, 2017. The truck is expected to have a salvage value of $2,200 at the end of its 4-year useful life. Assuming the declining-balance depreciation rate is double the straight-line rate, compute annual depreciation for the first and second years under the declining-balance method.

First Year depreciation is $18,750

Second Year depreciation is $ 9,375

Explanation:

Note that the Method used to provide for Depreciation is Declining Balance Method.

The established rate is used to compute depreciation on the remaining balance after taking account of previous depreciation charges.

Which is the appropriate rate to use?

The question gave us an assumption, "Assuming the declining-balance depreciation rate is double the straight-line rate"

So Working with this Assumption the Calculations are as follows

Straight Line Rate = 1/4×100 = 25%

Therefore Declining Balance Rate = 2×25%=50%

First Year depreciation is = Depreciable Amount ×Diminishing Rate

                                           =($39,700-$2,200) ×50%

                                           = $18,750

Second Year depreciation is = Carrying Amount × Diminishing Rate

                                                 =(($39,700-$2,200) - $18,750)×50%

                                                 = $ 9,375

Terms:

(1) Depreciable Amount is Cost less Salvage Value

(2)Carrying Amount is Cost less Accumulated depreciation to date