On Jan 1, 20012, Jen & Berry’s Ice Cream Co. purchased a new fleet of delivery t
ID: 2571470 • Letter: O
Question
On Jan 1, 20012, Jen & Berry’s Ice Cream Co. purchased a new fleet of delivery trucks for a total of $500,000. The estimated life of the trucks is 8 years. During those 8 years it is expected that the trucks can be driven a total of 800,000 miles. The total estimated residual value is $100,000.
Compute the depreciation expense on the fleet of trucks in 2012 and 2013 using the Straight Line and 200% Declining-Balance methods. Also calculate the 2012 and 2013 depreciation using the Units of Output Method if the trucks are driven a total of 80,000 miles in 2012 and 120,000 miles in 2013.
Finally, indicate which depreciation method would give Jen & Berry’s the largest profits in 2012.
Answers:
Method
2012 Depreciation Expense
2013 Depreciation Expense
Straight Line
200% Declining
Units of Output
Depreciation method giving Jen & Berry’s the largest profits in 2012:___________________
Briefly Explain Why:
Method
2012 Depreciation Expense
2013 Depreciation Expense
Straight Line
200% Declining
Units of Output
Explanation / Answer
Solution:
Part 1
Method
2012 Depreciation Expense
2013 Depreciation Expense
Straight Line
$50,000
$50,000
200% Declining
$125,000
$93,750
Units of Output
$40,000
$60,000
Calculation of Depreciation for 2012 and 2013 using different methods
Straight Line Method
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, there is same depreciation each year.
Mathematically,
Annual Depreciation = (Cost of Asset – Salvage Value) / Useful life
Annual Depreciation = (500,000 – 100,000)/8 = $50,000
2012 Depreciation Expense = $50,000
2013 Depreciation Expense = $50,000
Double Declining-balance 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.
Percentage = 100% / Useful Life x 2
Once the percentage is calculated, it is the same for the rest of the asset’s life.
Here the Annual Depreciation Rate = 100% / 8 Years useful life x 2 = 25%
Year
DDB Depreciation for the period
End of Period
Beginning of period book value
Depreciation Rate
Depreciation Expenses
Accumulated Depreciation
Book Value
2012
500,000
25%
125,000
125,000
375,000
2013
375,000
25%
93,750
218,750
281,250
2012 Depreciation Expense = $125,000
2013 Depreciation Expense = $93,750
Units of Output
Depreciation Rate per Miles = (Cost of Asset – Salvage Value) / Total Estimated Usage of Truck
= (500,000 – 100,000) / 800,000 Miles
= $0.50 per miles
2012 Depreciation Expense = Miles driven in 2012 x $0.50 = 80,000 miles x 0.50 = $40,000
2013 Depreciation Expense = 120,000 miles x $0.50 = $60,000
Part 2 ----
Depreciation method giving Jen & Berry’s the largest profits in 2012 Unit of Output Method
Explain --- Since the Depreciation Expense under Unit of Output Method in 2012 is less from all other methods. This method given largest profit in 2012.
Method
2012 Depreciation Expense
2013 Depreciation Expense
Straight Line
$50,000
$50,000
200% Declining
$125,000
$93,750
Units of Output
$40,000
$60,000
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