P9-31A Determining asset cost, preparing depreciation schedules (3 methods), Lea

Question

P9-31A Determining asset cost, preparing depreciation schedules (3 methods), Learning Objectives 1, 2 and identifying depreciation results that meet management objectives On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of $100,000 Before placing the truck in service, Rapid spent $3,000 painting it, $600 replacing tires, and $10,400 overhauling the engine. The truck should remain in service for five years and have a residual value of $12,000. The truck's annual mileage is expected to be 32,000 miles in each of the first four years and 8,000 miles in the fifth year-136,000 miles in total. In deciding which depreciation method to use, Andy Sargeant, the gen eral manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance) 1. Units-of-production, 12/31/18 Dep. Exp. $24,000 Requirements 1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. 2. Rapid prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the depreciation method that meets the company's objectives.

Explanation / Answer

1.

Cost of the asset = Cost + Painting expenses + Tires replacement expenses + engine overhauling expenses

= 100,000 + 3,000 + 600 + 10,400

= 114,000

Useful life = 5 years

Residual value = 12,000

Depreciation under Straight line method = (cost - salvage value) / useful life

= (114,000 - 12,000) / 5

= 20,400

Depreciation under units of production method = (cost - salvage value) * units this year / total estimated units

Depreciation under Double declining balance method = (cost - accumulated depreciation) / useful life * 2

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2.

Straight line method meets the company's objectives as it reports the low amount of depreciation compared to the other methods which inturn reports the high net income

Year Asset cost Depreciation expense Accumulated depreciation Asset book value 1 114,000 20,400 20,400 93,600 2 114,000 20,400 40,800 73,200 3 114,000 20,400 61,200 52,800 4 114,000 20,400 81,600 32,400 5 114,000 20,400 102,000 12,000

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