P931 A Determining asset cost, preparing depreciation schedules (3 methods), and
ID: 2550209 • Letter: P
Question
P931 A Determining asset cost, preparing depreciation schedules (3 methods), 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). 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 objectivesExplanation / Answer
Asset cost = Cost + Painting expenses + Tires replacement expenses + Enginee expenses
= 100,000 + 3,000 + 600 + 10,400
= 114,000
Residual value = 12,000
Useful life = 5 years
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) * miles this year / estimated miles
Depreciation under double declining balance method = (cost - accumulated depreciation) / useful life * 2
In double declining balance method, depreciation cannot be made below the salvage value.
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2. Considering the first year, Straight line method results in highest net income because it reports lowest amount of depreciation.
Year Cost Depreciation expense Accumulated depreciation 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 12,000Related Questions
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