Requirements: Prepare a depreciation sschedule for each depreciation method, sho
ID: 2596972 • Letter: R
Question
Requirements: Prepare a depreciation sschedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. Trusty prepares fianancial statements using the depreciation method that reports the highest net income in the early years of asset use. For income-tax purposes, the company uses the depreciation method that minimizes income taxes in the early years. Consider the first year that Tursty uses the truck. Identify the depreciaiont methods that meet the general manager's objectives, assuming the income tax authorities permit the use of any of the methods 1. On January 4, 2012, Speedway Delivery Service purchased a truck at a cost of $80,000. Before placing the truck in service, Speedway spent $3,000 painting it, $800 replacing tires, and $8,200 overhauling the engine. The truck should remain in service for five years and has residual value of $8,000. The truck's annual mileage is expected to be $30,000 miles in each of the first four years and 20,000 miles in the fifth year--140,000 miles in total. In deciding which depreciation method to use, Mikal Johnson, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of production, ddb).Explanation / Answer
Answer:
First of all we will find total cost of the truck
Purchase price of the truck
$ 80,000
Cost of painting
3,000
Cost of tire replacement
800
Coft of engine overhaul
8,200
Total cost of truck
$ 92,000
1
Straight line depreciation calculation
Annual depreciation expense =
Cost - Salvage value
Useful life in years
Annual depreciation expense =
$92000 - $8,000
5
Annual depreciation expense =
$84,000
5
Annual depreciation expense =
$16,800
Depreciation Schedule - Straight Line Method
Year
Assets
Depriciable
Depreciation
Accumulated
Book
cost
cost
rate
Expense
Depreciation
value
1
84,000
$84,000
1/5 x 12/12
$16,800
$16,800
$67,200
2
$84,000
1/5 x 12/12
$16,800
$33,600
$50,400
3
$84,000
1/5 x 12/12
$16,800
$50,400
$33,600
4
$84,000
1/5 x 12/12
$16,800
$67,200
$16,800
5
$84,000
1/5 x 12/12
$16,800
$84,000
$0
_________________________________________________-
2
Units of productio method
Depreciation expense per mile =
Cost - Salvage value
Useful life in miles
Depreciation expense per mile =
$92000 - $8,000
140,000
Depreciation expense per mile =
$84,000
80,000
Depreciation expense per mile =
$1.05
Depreciation Schedule - Units of Production Method
Year
Assets
per unit
Miles
Depreciation
Accumulated
Book
cost
cost
driven
Expense
Depreciation
value
1
92,000
0.6
30,000
$18,000
$18,000
$74,000
2
74,000
0.6
30,000
$18,000
$36,000
$56,000
3
56,000
0.6
30,000
$18,000
$54,000
$38,000
4
38,000
0.6
30,000
$18,000
$72,000
$20,000
5
20,000
0.6
20,000
$12,000
$84,000
$8,000
_________________________________________________________-----
3
Double declining balance method
DDB depreciation rate = (100% / 5) x 2
DDB depreciation rate = 40%
Depreciation Schedule - Double Declining Balance Method
Year
Acquisition
Beginig
Depreciation
Accumulated
Book
cost
Value
Rate
Expense
Depreciation
value
1
$92,000
$92,000
40%
$36,800
$36,800
$55,200
2
$92,000
$55,200
40%
$22,080
$58,880
$33,120
3
$92,000
$33,120
40%
$13,248
$72,128
$19,872
4
$92,000
$19,872
40%
$7,949
$80,077
$11,923
5
$92,000
$11,923
40%
$3,923
$84,000
$8,000
_____________________________________________________-----
4
Method which give highest net income for 1st year= Straight Line Method
Method which give lowest depriciation for 1st year= $16800
Method which minimize the taxes 1st year= Double Declining Balance Method
Depricaition amount for the year=$36800
Purchase price of the truck
$ 80,000
Cost of painting
3,000
Cost of tire replacement
800
Coft of engine overhaul
8,200
Total cost of truck
$ 92,000
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