Question

In: Accounting

Little TownLittle TownPizza bought a used Ford delivery van on January​ 2,20182018​, for$ 21 comma 800$21,800....

Little TownLittle TownPizza bought a used Ford delivery van on January​ 2,20182018​, for$ 21 comma 800$21,800. The van was expected to remain in service for four years left parenthesis 48 750(48,750 miles). At the end of its useful​ life, Little TownLittle Town management estimated that the​ van's residual value would be $ 2 comma 300$2,300. The van traveled 1500015,000 miles the first​ year, 1700017,000 miles the second​ year, 1250012,500 miles the third​ year, and 42504,250 miles in the fourth year.

1.

Prepare a schedule of depreciation expense per year for the van under the three depreciation methods.​ (For units-of-production and​ double-declining-balance methods, round to the nearest two decimal places after each step of the​ calculation.)

2.

Which method best tracks the wear and tear on the​ van?

3.

Which method would

Little TownLittle Town

prefer to use for income tax​ purposes? Explain your reasoning in detail.

Solutions

Expert Solution

Information Given -

Little Town Pizza bought a used Ford delivery van on January​ 2,2018 for $21800.

The van was expected to remain in service for four years (48750 miles).

Van's residual value = $2300.

The van traveled -

  • 15000 miles the first​ year,
  • 17000 miles the second​ year,
  • 12500 miles the third​ year, and
  • 4250 miles in the fourth year.

.

( 1 ) - Prepare a schedule of depreciation expense per year for the van under the three depreciation methods.​

Answer -

(a) - Straight line method -

Year Calculation Depreciation expense ($)
2018 ($21800 - $2300) / 4 years 4875
2019 ($21800 - $2300) / 4 years 4875
2020 ($21800 - $2300) / 4 years 4875
2021 ($21800 - $2300) / 4 years 4875

Total

19500

.

(b) - Units of production method -

Depreciation rate per mile = [($21800 - $2300) / 48750 miles] = $0.4 per mile.

Year Actual Miles Driven Depreciation rate per mile ($) Calculation Depreciation expense ($)
2018 15000 0.4 15000 miles * 0.4 6000
2019 17000 0.4 17000 miles * 0.4 6800
2020 12500 0.4 12500 miles * 0.4 5000
2021 4250 0.4 4250 miles * 0.4 1700
Total 19500

.

(c) - Double-declining-balance method -

Double-declining-balance rate = [2 * straight line percentage] = [2 * ($4875/$19500)] = 50%

Year Book value at the Beginning ($) Depreciation rate per year Depreciation expense ($) Book value at the End ($)
2018 21800 50%

10900

[21800*50%]

10900

[21800-10900]

2019 10900 50%

5450

[10900*50%]

5450

[10900-5450]

2020 5450 50%

2725

[5450*50%]

2725

[5450-2725]

2021 2725 -

425

[2725-2300]

2300

[residual value]

Total 19500 -

.

( 2 ) -- Which method best tracks the wear and tear on the​ van?

Answer - Units-of-production method.

.

( 3 ) -- Which method would Little Town prefer to use for income tax​ purposes?

Answer -

The Double-declining-balance method because, it provides the most depreciation and the largest tax deduction In the early life of the asset.


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