BagODonuts Company bought a used delivery truck on January 1, 2010, for $19,200.
ID: 2458443 • Letter: B
Question
BagODonuts Company bought a used delivery truck on January 1, 2010, for $19,200. The van was expected to remain in service 4 years (30,000 miles). BagODonuts’ accountant estimated that the truck’s residual value would be $2,400 at the end of its useful life. The truck traveled 8,000 miles the first year, 8,500 miles the second year, 5,500 miles the third year, and 8,000 miles in the fourth year.
1. Calculate depreciation expense for the truck for each year (2010-2013) using the:
a. Straight-line method.
b. Double-declining balance method.
c. Units of Production method.
(For units-of-production and double-declining balance, round to the nearest two decimals after each step of the calculation.)
2. Which method best tracks the wear and tear on the van?
3. Which method would BagODonuts prefer to use for income tax purposes? Explain in detail why BagODonuts prefers this method.
Explanation / Answer
1. Depreciation expense for the truck for each year (2010-2013) using the:
a. Straight-line method.
Depreciable value over 4 years = $19,200 - $2400 = $16800
Depreciation cost of the truck per year = $16800 / 4 = $4200 or 25% of balance at the beginning of year.
b. Double-declining balance method :
c. Units of Production method :
2. The best method tracks the wear and tear on the van is the depreciation on Units of Production method, because use are charging the depreciation on the assets at the level of production by the asset. Lower the production, lower the depreciation charged on the asset.
3. Method that would BagODonuts prefer to use for income tax purposes is the depreciation on Double-declining balance method, because through this method higher depreciation is being charged in the initial period of the asset. Higher the depreciation, lower will be the tax on the earning. So, it brings less pressure on earning of tax in the initial years of use of asset. When in later years there is lower production, lower the depreciation and tax charged to the earning would be lower also.
Year Net book value,beginning of year Double-declining balance depreciation computed as 2 × SL (i.e.25%*2=50%)rate × beginning NBV Net book value,
end of year 1 $19200 $9600 $9600 2 $9600 $4800 $4800 3 $4800 $2400 $2400 4 $2400 Salvage Value $2400
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