Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below Three different companies each purchased trucks on January 1, 2018, for $76,000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $6,000. All three trucks were driven 81,000 miles in 2018 55,000 miles in 2019, 46,000 miles in 2020, and 71,000 miles in 2021. Each of the three companies earned $65,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double- declining-balance depreciation, and company C uses units-of-production depreciation Answer each of the following questions. Ignore the effects of income taxes. c-1. Calculate the book value on the December 31, 2020, balance sheet? (Round "Per Unit Cost" to 3 decimal places.) Book Value CompanyA Company EB Company C

Explanation / Answer

Calculation of depreciation upto year 2020 for all the companies:

- Company A

Since Company A follows straight line method of depreciation, the depreciation for all the three years 2018, 2019 and 2020 would be same.

Depreciation per year = (Cost of asset - Salvage value) / Estimated useful life
= (76000 - 6000) / 4 = $17,500

So, depreciation for three years = 17,500 x 3 = $52,500

Book value on the Dec 31, 2020 Balance sheet = 76,000 - 52,500 = $23,500

- Company B

The company b follows double declining - balance depreciation method.

Formula for depreciation expense = 2 / estimated useful life x Book value at the beginning of the year

So, depreciation for first year = 2 x 4 / 76,000 = 38,000

Book value at the beginning of second year (i.e. 2019) = 76,000 - 38,000 = $38,000

Depreciation for second year = 2 x 4 / 38000 = 19,000

Book value at the beginning of third year (i.e. 2020) = 38,000 - 19,000 = $19,000

Depreciation for third year = 2 x 4 / 19,000 = $9,500

Book value at the end of third year (i.e. Dec 31, 2020) = 19,000 - 9,500 = $9,500.

- Company C

The Company C follows Units-of-production method of depreciation. In this case, depreciation is charged as per actual miles covered in a particular year.

Formula for depreciation expense = (Cost of the asset - Salvage value) x Miles covered during the year / Total estimated miles of the truck

Depreciation for first year = (76,000 - 6,000) x 81,000 / 250,000 = $22,680
Depreciation for second year = (76,000 - 6,000) x 55,000 / 250,000 = $15,400
Depreciation for third year = (76,000 - 6,000) x 46,000 / 250000 = $12,880

Total depreciation for three years = 22,680 + 15,400 + 12,880 = $50,960

Hence, book value at the end of 3 years i.e. Dec 31, 2020 = 76,000 - 50,960 = $25,040

To summarize,

Book Value Company A $23,500 Company B $9,500 Company C $25,040

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