Depreciation and the Steady State
Lyell Company started a newspaper delivery business on January 1, 2005. On that date, the company purchased a small pickup truck for $14,000.Lyell planned to depreciate the truck over three years and assumed an $800 residual value. During 2005 and 2006, Lyell’s business expanded. On January 1, 2006, Lyell purchased a second truck, identical to the first. On January 1, 2007, Lyell purchased a third truck, again identical to the first two. During 2007, Lyell’s growth leveled off. However, on January 1, 2008, Lyell bought another truck to replace the one (purchased in 2005) that had just worn out. All trucks purchased cost the same amount as the first truck.
Instructions:
1. Compute depreciation expense for 2005, 2006, 2007, and 2008 using the following:
(a) Straight line method
(b) Sum of the years’ digits method
2. What general conclusions can be Dr. awn from your calculations in (1)?