Question

On May 31, 2016, Sandals report purchased a truck at a cost of $160,000. before placing the truck into service, The company spend $2,500 painting it, $500 replacing tires, and $5,000 overhauling the engine. The truck should remain in service for 5 years and have a residual value of $7,500. The truck’s annual mileage is expected to be 15,000 in each of the first two years and 10,000 miles in the next three years. In deciding which depreciation method to use, the general manager request depreciation schedule for each of the depreciation methods (straight line, unit-of production, and double – declining-balance). work out each depreciation in the depreciation schedule. pass all transaction in the journal entry. journal entry must be included. show working out for each depreciation

Answer 1

Solution

Sandals Resort

Depreciation schedule for each of the depreciation methods:

Value of truck –

Cost $160,000

Add: painting $2,500

Replacing tires $500

Overhaul $5,000

Value $168,000

Straight line method
Annual Depreciation expense = depreciable base x 1/useful life

Depreciable base = value of truck – residual valueValue of truck= $168,000

Useful life = 5 years

Annual depreciation expense = $160,500/5 = $32,100

Year Depreciation = depreciation for 7 months, (May 31 – Dec 31)= 32,100 x 7/12 = $18,725Book value = cost – accumulated depreciation

Depreciation schedule –

Units of Production
Depreciation expense = depreciation rate x annual units of production

Depreciation rate = depreciable base/total annual mileage

Total annual mileage for 5 years = (15,000 + 15,000 + 10,000 + 10,000 + 10,000) = 60,000

Depreciable base = value of truck – residual value

Value of truck= $168,000

Residual value = $7,500

Depreciable base = 168,000 – 7,500 = $160,500

Depreciation rate = $160,500/60,000 = $2.675 per mile

Double Declining Balance Method
Depreciation expense, for Year 1 would be = cost x double declining balance depreciation rate

DDB depreciation rate = 2 x straight line depreciation rate

Straight line depreciation rate = 1/useful life

DDB depreciation rate = 2 x (1/5) = 40%

Depreciation expense for year 1 (May 31 – Dec 31), 7 months = 168,000 x 40% x 7/12

Year 1 depreciation expense = $39,200

Year 2 depreciation expense = DDB rate x book value

Book value = cost – accumulated depreciation

Year 1, Accumulated depreciation = $39,200

EOY 1, Book value = 168,000 – 39,200 = $128,800

Year 2

Depreciation expense = 128,800 x 40% = $51,520

Accumulated Depreciation = 39,200 + 51,520 = $90,720

Book value = 168,000 – 90,720 = $77,280

Year 3

Depreciation expense = 77,280 x 40% = $30,912

Accumulated depreciation = 39,200 + 51,520 + 30,912 = $121,632

Book value = 168,000 – 121,632 = $46,368

Year 4

Depreciation expense = 46,368 x 40% = $18,547

Accumulated depreciation = 39,200 + 51,520 + 30,912 + 18,547 = $140,179

Book value = 168,000 – 140,179 = $27,821

Year 5

Depreciation expense = 27,821 x 40% = $11,128

Accumulated depreciation = 39,200 + 51,520 +30,912 + 18,547 + 11,128 = $151,307

Book value = 168,000 – 151,307 = $16,693