Swift Trucking Company purchased a long-haul tractor trailer for $400,000 at the
ID: 2450237 • Letter: S
Question
Swift Trucking Company purchased a long-haul tractor trailer for $400,000 at the beginning of the year. The expected useful life of the tractor-trailer rig was eight years or 500,000 miles. Salvage value was estimated to be $40,000. During the first five years of use, the rig logged the following usage in miles: Year 1 was 80,000 miles, Year 2 was 75,000 miles, Year 3 was 80,000 miles, Year 4 was 76,000 miles and Year 5 was 60,000 miles for a total of 371,000 miles. Calculate the depreciation expense to be taken on the tractor-trailer for each year using the units-of-production method and then calculate the depreciation expense using the straight line method. Which method gives you higher total depreciation charges over the five-year period?
Explanation / Answer
Units-of-production method
Cost of tractor = $400,000
Salvage value = $40000
Cost of depreciable asset = $400,000 - $40,000 = $360,000
Expected useful life of tractor = 500,000 miles
Actual usage in Year 1 = 80,000 miles
Actual usage in Year 2 = 75,000 miles
Actual usage in Year 3 = 80,000 miles
Actual usage in Year 4 = 76,000 miles
Actual usage in Year 5 = 60,000 miles
Depreciation expense = (Actual Usage/Expected Usage) X Cost of depreciable asset
Depreciation expense for year 1 = (80,000/500,000) X $360,000 = $57,600
Depreciation expense for year 2 = (75,000/500,000) X $360,000 = $54,000
Depreciation expense for year 3 = (80,000/500,000) X $360,000 = $57,600
Depreciation expense for year 4 = (76,000/500,000) X $360,000 = $54,720
Depreciation expense for year 5 = (60,000/500,000) X $360,000 = $43,200
Total depreciaiton expense over five year period using units-of-production method = $57,600+$54,000+$57,600+$54,720+$43,200 = $267,120
Straight-line method
Cost of machine = $400,000
Salvage value = $40,000
Cost of depreciable asset = $400,000 - $40,000 = $106,000
Useful life = 8 years
Depreciation rate = 1/8 = 12.5%
Annual Depreciation = Cost of depreciable asset X Depreciation rate = $360,000 X 12.5% = $45,000
Depreciation expense for each year = $45,000
Total depreciaiton expense over five year period using Straight-line method = $45,000 X 5 = $225,000
Units-of-production method gives you higher total depreciation charges over the five-year period.
Note: In units-of-production method, depreciation expense is charged based on the actual usage of the asset. Thus it varies. But in straight-line method, the amount of depreciation expense charged is same in every year.
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