P9-31A Determining asset cost, preparing depreciation schedules (3 methods), and

Question

P9-31A Determining asset cost, preparing depreciation schedules (3 methods), and identifying depreciation results that meet management objectives On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of $100,000. Before placing the truck in service, Rapid spent $3,000 painting it, $600 replacing tires, and $10,400 overhauling the engine. The truck should remain in service for five years and have a residual value of $12,000. The truck's annual mileage is expected to be 32,000 miles in each of the first four years and 8,000 miles in the fifth year-136,000 miles in total. In deciding which depreciation method to use, Andy Sargeant, the gen- eral manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance). Requirements 1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. 2. Rapid prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the depreciation method that meets the company's obiectives

Explanation / Answer

Preparation of dep. schedule under straight line depriciation -

Straightline depriciation = (book value - salvage value) /useful life

= (114000-12000)/5

= 102000/5

= 20400

Depriciation under Straight line method -

Depriciation under units of production method -

Depriciation under Double declining balance method -

Dep. = 2*straight line dep.

= 2*20% = 40% per year

(2) for highest income we need to choose the dep. method which shows the min. expense of depriciation in earlier years.

so straight line dep. has the lowest dep. expense in earlier years so choose that method to meet the company's objectives.

Please comment in case of further clarification/wrong answer.

Cost of truck Cost of truck 100000 painting cost 3000 replacing tyres 600 overhauling engine 10400 Total cost of truck 114000

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