Question

On November 1, 2015 Polo company purchased a truck that has a cost of $40,000 and a salvage value of $4,000. The truck is expected to be driven during its 6 years of useful life as follows: 2015, 15,000 miles; 2016, 15,000 miles; 2017, 20,000 miles; 2018, 30,000 miles 2019, 10,000 miles and 2020, 10,000 miles. Polo Company uses units of activity method of depreciation
.
1- What is the total units of activity?
a) $40,000
b) $4,000
c) $36,000
d) 100,000 miles
2- What is the depreciable cost per unit? *
a) $36,000
b) $0.36 per mile
c) $0.4 per mile
d) $0.04 per mile
3- What is the depreciation expense for the year 2015? *
a) $6,000
b) $1,000
c) $5,400
d) $900
4- What is the book value for the year 2016? *
a) $34,600
b) $29,200
c) $22,000
d) $33,700
5- If the Polo Company uses the double declining balance (DDB) method, what is the annual depreciation expense for the year 2015? *
a) $13,333.33
b) $1,111.11
c) $2,222.22
d) None of the above
6- If the truck was purchased on August 1, 2015, what is the depreciation expense for the year 2015 under units of activity method? *
a) $5,400
b) $2,250
c) $2,700
d) $3,150
  

Answer 1

1-Total units of activity-

Correct Answer-

Year	Miles
2015	15,000
2016	15,000
2017	20,000
2018	30,000
2019	10,000
2020	10,000
Total units of activity	1,00,000 miles

Correct option-d)

2.Depreciable cost per unit-Given that the company uses units of activity method of depreciation, which formula is-

   Depreciation / Unit = (Cost-salvage) /Total units of activity

=(40,000-4,000)/1,00,000

=36,000/1,00,000= $ 0.36 Depreciable cost per unit. (option-b)

  

3.Depreciation expense for the year 2015- In 2015 units of activity=15000 miles

and depreciation per unit=$ 0.36

   so Depreciation expense=15000 milesx$ 0.36 =$ 5400 (option-c)

4. book value for the year 2016-cost $40,000 and depreciation for 2015=$ 5400

so book value for the year 2016=40,000-5400=$ 34,600 (option-a)

5. As the name implies, declining double balance doubles the rate at which you can depreciate your asset compared to the straight line method.

given-Cost: $40,000.00, Salvage: $4,000.00
Life: 6 years, Convention: Full-Month
First Year: 2 months

So depreciation rate will be=2 x (1/ Estimated useful life) x Book value at the beginning of the year x proprtional time in years *

Depreciation expense=2x (1/6) x 40000x2/12* =$ 2,222.22 (option-c)

*proprtional time in years -November 1, 2015 to december 31 2015 = 2 months or 2/12 years

6.If the truck was purchased on August 1, 2015, the depreciation expense for the year 2015 under units of activity method will not be affected as in this method units of activity is considered irrespective to the period so

Depreciation expense for the year 2015- In 2015 units of activity=15000 miles

and depreciation per unit=$ 0.36

   so Depreciation expense=15000 milesx$ 0.36 =$ 5,400 (option-a)