Question

On

January

1​,

2018​,

On Time

Delivery Service purchased a truck at a cost of

$75,000.

Before placing the truck in​ service,

On Time

spent

$2,200

painting​ it,

$1,700

replacing​ tires, and

$9,100

overhauling the engine. The truck should remain in service for five years and have a residual value of

$10,000.

The​ truck's annual mileage is expected to be

27,000

miles in each of the first four years and

12,000

miles in the fifth

year—120,000

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).Read the requirements

LOADING...

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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.

Straight-Line Depreciation Schedule
		Depreciation for the Year
	Asset	Depreciable		Useful		Depreciation	Accumulated	Book
Date	Cost	Cost		Life		Expense	Depreciation	Value
1-1-2018
12-31-2018			/		=
12-31-2019			/		=
12-31-2020			/		=
12-31-2021			/		=
12-31-2022			/		=

1.	Prepare a depreciation schedule for each depreciation​ method, showing asset​ cost, depreciation​ expense, accumulated​ depreciation, and asset book value.
2.	On Time 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 On Time uses the truck. Identify the depreciation method that meets the​ company's objectives.

Answer 1

Based on the information available in the question, we can prepare the depreciation schedules as follows:-

a.) Straight line depreciation schedule

Depreciation expense = (Cost of the asset - Salvage value)/Estimated life of the asset

Cost of the asset = $75,000 + $2,200 + $1,700 + $9,100

Cost of the asset = $88,000

Depreciation expense = ($88,000 - $10,000) = $78,000/5 years = $15,600 per year.

		DDB Depreciation for the period	End of the Period
Date	Asset cost	Depreciable cost	Depreciation Rate	Depreciation expense	Accumulated Depreciation	Book Value (Cost of asset - Accumulated Depreciation)
01/01/18	88,000
12/31/2018		78,000	5 years	15,600	15,600	72,400
12/31/2019		78,000	5 years	15,600	31,200	56,800
12/31/2020		78,000	5 years	15,600	46,800	41,200
12/31/2021		78,000	5 years	15,600	62,400	25,600
12/31/2022		78,000	5 years	15,600	78,000	10,000

b.) Units of Production Depreciation Schedule:-

(Cost - Residual Value)/Expected life in miles = Depreciation per mile

($88,000 - $10,000)/120,000 = $0.65 per mile

		Units of Production Depreciation method	End of the Period
Date	Asset cost	Depreciation per mile	Number of miles	Depreciation expense	Accumulated Depreciation	Book Value (Cost of asset - Accumulated Depreciation)
01/01/18	88,000
12/31/2018		0.65	27,000	17,550	17,550	70,450
12/31/2019		0.65	27,000	17,550	35,100	52,900
12/31/2020		0.65	27,000	17,550	52,650	35,350
12/31/2021		0.65	27,000	17,550	70,200	17,800
12/31/2022		0.65	12,000	7,800	78,000	10,000

c.) Double Declining balance Depreciation schedule:-

		Units of Production Depreciation method	End of the Period
Date	Asset cost	Book Value	DDB Rate	Depreciation expense	Accumulated Depreciation	Book Value (Cost of asset - Accumulated Depreciation)
01/01/18	88,000
12/31/2018		88,000.00	40%	35,200	35,200	52,800
12/31/2019		52,800.00	40%	21,120	56,320	31,680
12/31/2020		31,680.00	40%	12,672	68,992	19,008
12/31/2021		19,008.00	40%	7,603	76,595	11,405
12/31/2022		11,404.80	40%	1,405	78,000	10,000

The Depreciation rate under the double declining balance method is calculated as follows:-

100%/5 years = 20% * 2 = 40% per period.

However, during the 2022 year (year 5) depreciation expense is limited to $1,405 because an asset will be depreciated only upto its salvage value, Hence, the book value of the asset at the end of Year 5 is $10,000.

Requirement 2:-

The company should adopt the Straight line method of depreciation as it meets the company's objectives of higher net income in the initial years. The depreciation expense is lower in the early years under the Straight line depreciation method and a lower expense means a higher Net Income. Hence, the company may adopt the Straight line method of depreciation.

Please let me know if you have any questions via comments and all the best :) !