Depreciation is a process of asset valuation, not cost allocation. Depreciation

Question

Depreciation is a process of asset valuation, not cost allocation. Depreciation provides for the proper matching of expenses with revenues. The book value of a plant asset should approximate its fair value. Depreciation applies to three classes of plant assets: land, buildings, and equipment. Depreciation does not apply to a building because its usefulness and revenue-producing ability generally remain intact over time. The revenue-producing ability of a depreciable asset will decline due to wear and to obsolescence. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset. The balance in accumulated depreciation represents the total cost that has been charged to expense. Depreciation expense and accumulated depreciation are reported on the income statement. Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual value. Instructions Identify each statement as true or false. If false, indicate how to correct the statement. Yello Bus Lines uses the units-of-activity method in depreciating its buses. One bus was purchased on January 1, 2014, at a cost of $ 148,000. Over its 4-year useful life, the bus is expected to be driven 100,000 miles. Salvage value is expected to be $8,000. Instructions Compute the depreciable cost per unit. 2015. Prepare a depreciation schedule assuming actual mileage was. 2014, 32,000; 2016, 25,000; and 2017, 17,000.

Explanation / Answer

1. Depreciable cost per unit=( cost- salvage value)/ expected usage

= 148000- 8000/ 100000 = 1.4

2. Depreciation schedule:-

Year Actual milage (1) depreciation rate(2) amount (1*2) $ 2014 26000 1.4 36400 2015 32000 1.4 44800 2016 25000 1.4 35000 2017 17000 1.4 23800 Total 140000

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