In: Accounting
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. |
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 = $2300.
The van traveled -
.
( 1 ) - Prepare a schedule of depreciation expense per year for the van under the three depreciation methods.
Answer -
(a) - Straight line method -
Year | Calculation | Depreciation expense ($) |
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.