Problem 9-2A In recent years, Avery Transportation purchased three used buses. B
ID: 2532406 • Letter: P
Question
Problem 9-2A In recent years, Avery Transportation purchased three used buses. Because of frequent turnover in the accounting department, a different accountant selected the depreciation method for each bu various methods were selected. Information concerning the buses is shown as follows Salvage Value Useful Life in Years Bus Acquired Cost Method $96,000 110,000 92,000 6,000 10,000 8,000 Straight-line Declining-balance Units-of-activity For the declining-baae method, the company uses the double-declining rate. For the units-of-activity method, total miles are expected to be 120,000. Actual miles of use in the first 3 years were 2018, 24,000; 2019, 34,000; and 2020, 30,000 For Bus #3, calculate depreciation expense per mile under units-of-activity method. (Round answer to 2 decimal places, eg, 0.50.) Depreciation expense per mile Compute the amount of accumulated depreciation on each bus at December 31, 2019. (Round depreciation cost per unit to 2 decimal places, e.g. 0.50 and depreciation rate to O decima places, e.g. 15%. Round final answers to 0 decimal places, eg. 2,125.) Accumulated depreciation BUS 1 BUS 2 BUS 3Explanation / Answer
Solution:
Part 1 --- Bus 3 --- Units of Activity Method
Units of Production/Activity Method
Under the Units of Activity method of depreciation, depreciation is charged according to the actual usage of the asset. Higher depreciation is charged when there is higher activity and less is charged when there is low level of operation. Zero depreciation is charged when the asset is idle for the whole period.
Estimated production Units during life of machine = 120,000 Miles
Bus’s Depreciable Cost = Cost of Asset – Salvage Value = $92,000 – 8,000 = $84,000
Under the units of production method, the Bus’s depreciable cost of $84,000 is divided by estimated activity during the life of asset 120,000 Miles, resulting in depreciation of $0.70 per mile
Depreciation Expense $0.70 per mile
Part 2 --- Accumulated Depreciation for all bus till Dec 31, 2019
Bus 1 --- Method Straight line method of depreciation
Straight line method is a method of calculating depreciation of an asset.
Under this method depreciation is calculated by dividing depreciable asset value by estimated useful life.
Depreciable Asset Value = Cost of Asset – Salvage Value
In this method, depreciation for each year remains same.
Mathematically,
Annual Depreciation = (Cost of Asset – Salvage Value) / Useful life
Annual Depreciation = (96,000 – 6000) / 5 = $18,000
Bus 1
Depreciation Schedule
(Straight Line Method)
Year
Depreciation Expense
12/31/2017
$18,000
12/31/2018
$18,000
12/31/2019
$18,000
Total
$54,000
Bus 2 --- Accumulated Depreciation at Dec 31, 2019 – Declining Balance method
Double Declining Depreciation Method
It is a method of depreciation used by the companies when they want to quickly depreciate an asset.
The asset will depreciate much faster under this method than straight-line because we double the percentage that would be depreciated each year under straight-line.
Salvage value is not subtracted from Cost of Asset when depreciation is calculated by using this method.
The formula for double declining balance is:
Annual depreciation = Book Value * 100% / life * 2
Calculate the percentage that should be used first.
Depreciation Rate = 100% / Useful Life x 2 = 100% / 4 x 2 = 50%
Year
DDB Depreciation for the period
End of Period
Beginning of period book value
Depreciation Rate
Depreciation Expenses
Accumulated Depreciation
Book Value
1/1/2017
110,000
50%
55,000
55,000
55,000
12/31/2017
55,000
50%
27,500
82,500
27,500
12/31/2018
27,500
50%
13,750
96,250
13,750
12/31/2019
13,750
50%
6,875
3,750
103,125
100,000
6,875
10,000
Note --- The annual depreciation for Year ending 2019 is more than the amount of remaining depreciation we are allowed to take on the asset. Therefore, we cannot take the full amount of depreciation calculated. Instead, we are limited to $3,750 in Year 3.
Bus 2 --- Accumulated Depreciation at Dec 31, 2019 = $100,000
Bus 3 --- Accumulated Depreciation at Dec 31, 2019 ---- Units of Activity Method of Depreciation
Year
Activity Usage (Miles)
Depreciation Rate per miles
Depreciation (Miles x Rate per Miles)
31/12/18
24,000
$0.70
$16,800
31/12/19
34,000
$0.70
$23,800
Total
$40,600
Bus 3 --- Accumulated Depreciation at Dec 31, 2019 = $40,600
Summary of Accumulated Depreciation
Accumulated Depreciation at Dec 31, 2019
BUS 1
$54,000
BUS 2
$100,000
BUS 3
$40,600
Part 3 ---- If Bus 2 was purchased on April 1 --- then Depreciation Expense for 2017 & 2018
Refer Working for part 2 ---- 2017 Depreciation Expenses is for 9 months = 55,000*9/12 = $41,250
Book Value as on Jan 1, 2018 = 110,000 – 41,250 = $68,750
Depreciation for 2018 = Beginning Book Value 68,750 * 50% = $34,375
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Bus 1
Depreciation Schedule
(Straight Line Method)
Year
Depreciation Expense
12/31/2017
$18,000
12/31/2018
$18,000
12/31/2019
$18,000
Total
$54,000
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