Camey Corporation purchased delivery equipment on January 1 at a cost of $300,00

Question

Camey Corporation purchased delivery equipment on January 1 at a cost of $300,000. The equipment is expected to have a useful life of seven years or 250,000 miles, and to have no salvage value. How much depreciation expense should e recorded during the first year using the straight line, double declining balance, and units-of production methods? During the year, the equipment was used for 80,000 miles. The company’s fiscal year-end is December 31.

Assume that revenue for the year is $376, 300 and that all expenses, other than for depreciation total $225,492. Would the use of one depreciation method instead of another have a material effect on the income statement? Discuss (ignore taxes)

Explanation / Answer

Straight line. Since useful life is 7 years, straight line depreciation 300,000/7 = $42,857.14 for one year.

Double declining balance. This is twice the straight line rate. Since the useful life is 7 year, straight line is 1/7. Twice this is 2*1/7. Depreciation for the first year is 300,000*2*1/7 = $85,714.29.

Units of production. 300,000*80,000 miles/250,000 miles = $96,000.

Revenue – expenses other than depreciation = 376,300 – 225,492 = 150,808. Depending on the depreciation method used, you could end up with 54,808 (using units of production), 65,093.71 (using double declining balance), or 107,950.86 (using straight line) for net income. This would be a material effect. The net income from using straight-line is almost double that when units of production is used. It might be better to use the units of production method because it is more conservative.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.