Question

On January 3​, 2018​, Quick Delivery Service purchased a truck at a cost of $67,000. Before placing the truck in​ service, Quick spent $4,000 painting​ it, $1,500 replacing​ tires, and $2,200 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100. The​ truck's annual mileage is expected to be 20,000 miles in each of the first four years and 12,800 miles in the fifth year—92,800 miles in total. In deciding which depreciation method to​ use, Jacob Nealy​, the general​ manager, requests a depreciation schedule for each of the depreciation methods​ (straight-line, units-of-production, and​ double-declining-balance).

Requirement 1. Prepare a depreciation schedule for each depreciation​ method, showing asset​ cost, depreciation​ expense, accumulated​ depreciation, and asset book value. Begin by preparing a depreciation schedule using the​ straight-line method.

Requirement 2. Quick prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Quick uses the truck. Identify the depreciation method that meets the​ company's objectives.

Answer 1

On January 3​, 2018​, Quick Delivery Service purchased a truck at a cost of $67,000. Before placing the truck in​ service, Quick spent $4,000 painting​ it, $1,500 replacing​ tires, and $2,200 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100.

Total cost of truck = 67,000 + 4,000 + 1,500 + 2,200

= $74,700

(1) Straight line method

Annual depreciation = (Cost of asset - Residual value)/Useful life

= (74,700 - 5,100)/5

= 69,600/5

= $13,920

Depreciation rate = 13,920/69,600

= 20%

Depreciation schedule

Year	Cost of truck	Depreciation expense	Accumulated depreciation	Book value
2018	74,700	13,920	13,920	60,780
2019		13,920	27,840	46,860
2020		13,920	41,760	32,940
2021		13,920	55,680	19,020
2022		13,920	69,600	5,100

(2) Double declining balance method

Double declining depreciation rate = Straight line depreciation rate x 2

= 20 x 2

= 40%

Depreciation schedule

Year	Cost of truck	Depreciation expense	Accumulated depreciation	Book value
2018	74,700	74,700 x 40% = 29,880	29,880	44,820
2019		44,820 x 40% = 17,928	47,808	26,892
2020		26,892 x 40% = 10,757	58,565	16,135
2021		16,135 x 40% = 6,454	65,019	9,681
2022		9,681 x 40% = 3,872	68,891	5,809

(3) Units of production method

Depreciation per mile = (Cost of truck - Residual value)/Life in miles

= (74,700 - 5,100)/92,800

= $0.75

Depreciation schedule

Year	Cost of truck	Annual mileage	Depreciation expense =Annual mileage x 0.75	Accumulated depreciation	Book value
2018	74,700	20,000	20,000 x 0.75 = 15,000	15,000	59,700
2019		20,000	20,000 x 0.75 = 15,000	30,000	44,700
2020		20,000	20,000 x 0.75 = 15,000	45,000	29,700
2021		20,000	20,000 x 0.75 = 15,000	60,000	14,700
2022		12,800	12,800 x 0.75 = 9,600	69,600	5,100

Requirement 2

Lowest depreciation in the first year is $13,920 as per straight line method. Hence to get highest income in the first year, straight line method should be used.