Question

6. on January 3, 2018, fast delivery service purchased a truck at a cost of $95,000. Before placing the truck in service, fast spent $2,200 painting it, $500 replacing tires, and $11,300 overhauling the engine. The truck should remain in service for five years and have a residual value of $10,000. The truck annual mileage is expected to be 26,000 miles in each of the first four years in 19,750 miles in the fifth year- 123,750 Miles in total. And deciding which depreciation method to use, Stephen K, The general manager, requires a depreciation schedule for each of depreciation method (straight line, units of production, and double declining balance).

Requirement number 1: prepare a depreciation schedule for each depreciation method showing assets cost, depreciation this expense, accumulated depreciation, and assets book value.

- Begin by preparing a depreciation schedule using the straight-line method.

• Before completing the units of production depreciation schedule, calculate the depreciation expense per unit. Select the formula, then answer the amounts and calculate the depreciation expense per unit.

- Prepare a depreciation schedule using the units of production method.

- Prepare a depreciation schedule using the double declining balance (DDB) method.

Requirement number 2: fast prepares financial statements using the depreciation method that reports the highest net income in the early years of acid use. Consider the first year the fast uses the truck. Identify the depreciation method that meets the company objectives.

• The depreciation method that records the highest net income in the first year is the _____ method. It produces the _____ depreciation expense and therefore the highest net income.

Answer 1

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Fast delivery
Capitalized cost of truck	Amount $
Purchase price	95,000.00
Add: Cost of painting	2,200.00
Add: Cost of replacing tires	500.00
Add: Cost of overhauling the engine	11,300.00
Capitalized cost of truck	109,000.00

Straight Line Method	Amount $	Note
Capitalized cost of truck	109,000.00	A
Less: Residual Value	10,000.00
Depreciable Value	99,000.00	B
Estimated life	5.00	C
Annual Depreciation	19,800.000	D=B/C

Year	Beginning Book Value	Depreciation Expense	Accumulated Depreciation	End Book Value
2018	109,000.00	19,800.00	19,800.00	89,200.00
2019	89,200.00	19,800.00	39,600.00	69,400.00
2020	69,400.00	19,800.00	59,400.00	49,600.00
2021	49,600.00	19,800.00	79,200.00	29,800.00
2022	29,800.00	19,800.00	99,000.00	10,000.00

Double Declining Method	Amount $
Capitalized cost of truck	109,000.00	See A
Estimated life	5.00	See C
Annual depreciation	21,800.00	E=A/C
Depreciation rate	20.00%	F=E/A
Double Depreciation %	40.00%	G=F*2

Year	Beginning Book Value	DDB Factor	Depreciation Expense	Accumulated Depreciation	End Book Value
2018	109,000.00	40.00%	43,600.00	43,600.00	65,400.00
2019	65,400.00	40.00%	26,160.00	69,760.00	39,240.00
2020	39,240.00	40.00%	15,696.00	85,456.00	23,544.00
2021	23,544.00	40.00%	9,418.00	94,874.00	14,126.00
2022	14,126.00	40.00%	5,650.00	100,524.00	8,476.00

Units of Production Method	Amount $
Capitalized cost of truck	109,000.00
Less: Residual Value	10,000.00
Depreciable Value	99,000.00
Total miles	123,750.00
Depreciation per mile	0.800

Year	Beginning Book Value	Miles Run	Depreciation per mile	Depreciation Expense	Accumulated Depreciation	End Book Value
2018	109,000.00	26,000.00	0.80	20,800.00	20,800.00	88,200.00
2019	88,200.00	26,000.00	0.80	20,800.00	41,600.00	67,400.00
2020	67,400.00	26,000.00	0.80	20,800.00	62,400.00	46,600.00
2021	46,600.00	26,000.00	0.80	20,800.00	83,200.00	25,800.00
2022	25,800.00	19,750.00	0.80	15,800.00	99,000.00	10,000.00

The depreciation method that records the highest net income in the first year is the Straight Line method. It produces the largest depreciation expense and therefore the highest net income.