Question

On January 1, Year 1, the City Taxi Company purchased a new taxi cab for $90,000. The cab has an expected salvage value of $38,000. The company estimates that the cab will be driven 200,000 miles over its life. It uses the units-of-production method to determine depreciation expense. The cab was driven 45,000 miles the first year and 102,000 the second year. What would be the depreciation expense reported on the Year 2 income statement and the book value of the taxi, respectively, at the end of Year 2?

		$26,520 and $13,780.
		$26,520 and $51,780.
		$45,900 and -$14,150.
		$45,900 and $23,850

Answer 1

Original Cost of Taxi Cab = $90,000

Salvage Value = $38,000

Total Number of miles expected to be driven during the useful life = 200,000 miles

Number of miles driven for the first year = 45,000 miles

Number of miles driven for the second year = 102,000 miles

Depreciation rate per mile

= (Original Cost - Salvage Value) / Total Miles during the useful life

= ($90,000 - $38,000) / 200,000

= 52,000 / 200,000

= $0.26 per mile

Depreciation for the first year

= Depreciation rate per mile * Miles driven for the first year

= $0.26 * 45,000

= $11,700

Book Value at the end Year 1

= Original Cost - Depreciatiojn for the Year 1

= $90,000 - $11,700

= $78,300

Deprecciation for the secong year

= Depreciation rate per mile * Miles driven for the Year 2

= $0.26 * 102,000

= $26,520

Book Value at the end of Year 2

= Book Value at the end of Year 1 - Depreciation for the Year 2

= $78,300 - $26,520

= $51,780

Correct Option: $26,520 and $51,780