Question

Exercise # 2 Part 1

A company has just invested in a fleet of 12 new delivery trucks. They are identical in terms of features, capability, and price. The companies operation involves deliveries to

long haul' destinations, and 'short haul' destinations. The company assumes each truck to have a useful life of 5 years. Experience has shown that the 'long haul' trucks typically

develop problems, or wear out, twice as fast as the 'short haul' trucks, primarily due to the significantly higher number of miles driven each year. The trucks cost $195,000 per

truck. The 'Kelley Blue Book' value for these trucks in five years time will be $20,000. The company will use 4 of the new trucks as 'long haul', and the remainder as 'short haul'

vehicles. The accountants feel it is appropriate to depreciate the vehicles at different rates, due to their different usage levels.

Set up a depreciation schedule for the 'long haul' and 'short haul' trucks, choosing a depreciation method you feel is appropriate. Comment on your rationale for selecting the

method you did for each truck type. Make sure to state all assumptions or estimates.

Part 2

Show the accounting entries that would be required to represent vehicle depreciation in the companies books.   Will any accounting adjustments be required if the trucks that

were just purchased are still being used 8 years from now?

Answer 1

PART 1 . Assets have different usage level therefore different rate/method of depreciation can be used here as envisaged by the accountant.

For "Short Haul" Straight line of depreciation is used. And for Long Haul "Double-Declining Rate" (DDR) is used.

Rationale - Long haul is subject to wear and tear twice as compare to short haul therefore DDR is appropriate

Depreciation Schedule for Short haul Truck    

= 195000-20000 / 5 year

=35000 $

Year	Depreciation Expense per truck $	Balance at the year end $
1	35000	160000
2	35000	125000
3	35000	90000
4	35000	55000
5	35000	20000 (Equal to Salvage Value)

Depreciation Schedule for Long Haul Truck

Rate of Depreciation = 100% / 5

                                 = 20 % Per Year

Double the rate calculated above = 20 % * 2

                                                     = 40 %

Year	Depreciation Expense Per Truck $ { 40 % of (Book value- Accumulated Depreciation ) }	Balance at year end $
1	78000	117000
2	46800	70200
3	28080	42120
4	16848	25272
5	5272	20000

PART 2.

Accounting Entry year 1

For Short Haul truck

1.          Short haul Truck A/c   Dr.         195000 $

                  To Cash/ Bank A/c                              195000 $

2.         Depreciation Expense A/c Dr.   35000 $

                 To Short Haul Truck A/c                       35000 $

Note - Entries for rest of the year can easily be made. Entries are passed only for single truck. Total no. of Short haul truck are 8, calculation can be made in respect of that.

For long haul truck

1.          Long haul Truck A/c   Dr.         195000 $

                  To Cash/ Bank A/c                              195000 $

2.         Depreciation Expense A/c Dr.   78000 $

                 To Long Haul Truck A/c                       78000 $

Note Entries for rest of the year can easily be made. Entries are passed only for single truck. Total no. of Long haul truck are 4, calculation can be made in respect of that.

Accounting Adjustment for using truck beyond useful life

When an asset has been completely depreciated, it is considered to be "off the books" of the company. A salvage value (20000 $), that value stays on the books until the item is sold or scrapped. Therefore there in no accounting adj need to made for using asset beyond its useful life i.e. 5 year.

              ----- For any doubt or clarification you are always welcome. Put your doubt in comment section.-----