During the current year, Central Auto Rentals purchased 60 new automobiles at a
ID: 2599499 • Letter: D
Question
During the current year, Central Auto Rentals purchased 60 new automobiles at a cost of $9,000 per car. The cars will be sold to a wholesaler at an estimated $2,000 each as soon as they have been driven 50,000 miles. Central Auto Rentals computes depreciation expense on its automobiles by the units-of-output method, based on mileage.
a. Compute the amount of depreciation to be recognized for each mile that a rental automobile is driven.
b. Assuming that the 60 rental cars are driven a total of 1,600,000 miles during the current year, compute the total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year.
Explanation / Answer
a)
Depreciable amount of each automobile
= (Purchase cost – Salvage value)
= $9,000 - $2,000
= $7,000
Depreciation per mile
= Depreciable amount / Useful life in miles
= $7,000 / 50,000
= $0.14 per mile
b)
Total depreciation to be recognized
= Total miles driven x Depreciation per mile
= 1,600,000 x $0.14
= $224,000
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