On January 2, 2006, Speedway Delivery Service purchased a truck at a cost of $63

Question

On January 2, 2006, Speedway Delivery Service purchased a truck at a cost of $63,000. Before placing the truck in service, Speedway spent $2,200 painting it, $800 replacing tires, and $4,000 overhauling the engine. The truck should remain in service for 6 years and have a residual value of $14,200. The truck's annual mileage is expected to be 8,000 miles in each of the first four years and 14,000 miles in each of the next two years-100,000 miles in total. In deciding which depreciation method to use, Jerry Sprees, the general 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. Speedway prepares financial 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 Speedway uses the truck. Identify the depreciation methods that meet the general manager's objectives, assuming the income tax authorities permit the use of any of the methods.

Explanation / Answer

2) As per the given methods of depreciation, the company uses the method in which minimises Income tax in the earlier years. Hence the best option would be to use Diuble decline method of depreciation as the depreciation expense in 1st year is $23,333, in 2nd year is $15,556, in 3rd is $10,570 and in last year is $6,541

1 Depreciation Methods Depreciation Schedule- Double Declining Balance Method Year Book Value Depreciation Depreciation Accumulated Book Value Year Start Percent Expense Depreciation Year End 2006          70,000 33.33%          23,333          23,333          46,667 2007          46,667 33.33%          15,556          38,889          31,111 2008          31,111 33.33%          10,370          49,259          20,741 2009          20,741 31.54%             6,541          55,800          14,200 Depreciation Schedule- Unit of Production Method Unit of Production Book Value Depreciation/ unit Depreciation Accumulated Book Value 2006          70,000 $0.56          10,044          10,044          59,956 2007          59,956 $0.56          10,044          20,088          49,912 2008          49,912 $0.56          10,044          30,132          39,868 2009          39,868 $0.56          10,044          40,176          29,824 2010          29,824 $0.56             7,812          47,988          22,012 2011          22,012 $0.56             7,812          55,800          14,200 Depreciation Schedule- Staright Line Method Unit of Production Book Value Depreciation Accumulated Book Value 2006          55,800             9,300             9,300          46,500 2007          46,500             9,300          18,600          37,200 2008          37,200             9,300          27,900          27,900 2009          27,900             9,300          37,200          18,600 2010          18,600             9,300          46,500             9,300 2011             9,300             9,300          55,800                    -  

2) As per the given methods of depreciation, the company uses the method in which minimises Income tax in the earlier years. Hence the best option would be to use Diuble decline method of depreciation as the depreciation expense in 1st year is $23,333, in 2nd year is $15,556, in 3rd is $10,570 and in last year is $6,541

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