Question

In: Accounting

On January 8, 2017, Whitewater Riders purchased a van to transport rafters back to the point...

On January 8, 2017, Whitewater Riders purchased a van to transport rafters back to the point of departure after completing the on-the-water portion of the rafting adventures they operate. The cost of the van is $44,000 and Whitewater Rider expects to use the van for four years or 60,000 miles. The estimated selling price after four years is $2,000. The van was driven 12,000 miles in 2017, 18,000 miles in 2018, 21,000 miles in 2019, and 10,000 miles in 2020.

Required:

On the following Whitewater Riders worksheet, compute the annual depreciation expense and ending book value of the van using straight-line, double-declining, and units-of-production methods. In addition, answer the three questions below:

1. Which method results in the highest net income for Whitewater Riders?

a. 2017 b. 2018 c. 2019. d. 2020

2. Which method results in the lowest income tax liability for Whitewater Riders?

a. 2017 b. 2018 c. 2019. d. 2020

3. Which method would you recommend Whitewater Riders use and why?

Whitewater Riders

Schedule of Van Depreciation for years 2017- 2020

Depreciation Method Year Depreciation expense Ending Book Value

Straight-line 2017

Straight-line 2018

Straight-line 2019

Straight-line 2020

Double-declining 2017

Double-declining 2018

Double-declining 2019

Double-declining 2020

Units-of-production 2017

Units-of-production 2018

Units-of-production 2019

Units-of-production 2020

Solutions

Expert Solution

Straight-line method

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

= (44000-2000)/4= 10500

Double declining method

Depreciation % in straight-line method= 10500/42000= 25%

Depreciation % in double declining method = 25% x 2= 50%

Depreciation expense= Book value x Depreciation %

Units of production method

Depreciation expenses= Depreciation base x % Units produced

Units driven in 2017= 12000/60000=20%

Units driven in 2018=18000/60000= 30%

Units driven in 2019= 21000/60000= 35%

1. A- 2017= Units of production

B- 2018= Straight-line

C- 2019= Double declining

D- 2020= Double decling

A- 2017= Double declining

B- 2018= Unit of production

C- 2019= Unit of production

D- 2020=Straight-line

3. I would recommend double declining method since he can get more depreciation tax shield on the early stage of using the asset.

ekkarill92 answered 1 year ago

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