Question

1. Speedy Taxi Service purchased a new cab for $33,500. It is expected to have a salvage value of $1000 and a life of 3 years. The cab is expected to be driven 150,000 miles over those three years. It has been driven 30,000 miles in year 1 and 20,000 miles in year 2.
   1. Compute the annual depreciation for the first two years under each of the following methods:
      1. Straight Line
      2. Units-of-Activity
      3. Double-Declining

If you were the owner of the Taxi Service, which method and why would you deem most appropriate?Summit Company sells equipment on June 30, 2020. The equipment originally cost $45,000 and as of December 31, 2019 had accumulated depreciation of $24,000. Depreciation expense for the first six months of 2020 is $4,000.

Prepare the journal entries to record the depreciation expenses up to the date of sale and to record the sale of the equipment in these two independent situations. (Sales price – Book value = gain or loss)

1. Sold for $25,000 on June 30, 2020
2. Sold for $10,000 on June 30, 2020

#	Account Titles and Explanation	Ref	Debit	Credit

EXTRA CREDIT: Match the statement with the term most directly associated with it.

Goodwill

Intangible Assets

Research and development costs

Amortization

Franchises

1. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.___________________________________
2. The excess of cost of a company over the fair value of the net assets acquired.___________________________________
3. A right to sell certain products or services, or use certain trademarks or trade names within a designated geographic area._______________________________________
4. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.________________________________________________
5. The allocation of the cost of an intangible asset to expense in a rational and systematic manner._________________________________________________

Answer 1

Annual Depreciation for the first two years under the following methods:

Straight line :

In the straight-line depreciation method, depreciation will not be changed over the life of the asset.

Depreciation per annum = (33500-1000)/3 = 10833.

Depreciation for the first year = 10833

Depreciation for the second year = 10833

Units of activity:

In this method, depreciation changes according to the activity taken.

Depreciation for the first year =(33500-1000)*30000/150000

= 6500

Depreciation for the second year = (33500-1000)*20000/150000

= 4333

​​​​​​Double - declining :

In this method, depreciation decreases with the life of the asset. It ignores salvage value.

Depreciation formula = 2 * (bookvalue/useful life)

Depreciation for the first year = 2*(33500/3) = 22333

Depreciation for the second year = 2*{(33500-22333)/3}

= 7445.

If I were the owner of the taxi service, double declining method is considered most appropriate because it creates minimum loss at the disposal and reduces tax obligations. In the first two years itself, the depreciation amount covered most of the value of the asset.

Equipment original cost is $45000 and the accumulated depreciation is $24000. So the book value of the Equipment will be $21000.

Journal entries

For depreciation:

Depreciation a/c Dr $4000

To Profit and loss a/c $4000

(Being depreciation is recorded upto 30th June 2020)

For sale of the equipment:

When sold for $25000:

Cash/Bank a/c Dr $25000   

To Equipment a/c $25000

(Being sale of Equipment for $2500)

Gain on sale of Equipment a/c Dr $4000

To Profit and loss a/c $4000

(Being gain on sale of Equipment i.e $4000 ($25000-$21000))

When sold for $10000:

Cash/Bank a/c Dr $10000

To Equipment a/c. $10000

(Being sale of Equipment made)

Profit and loss a/c Dr. $11000

To loss on sale of Equipment a/c $11000

(Being loss made on sale of Equipment i.e. $11000 (21000-10000))

Matching the statement:

Rights, privileges and competitive advantages that results from ownership of long-lived assets that doesn't possess physical substance - Intangible assets.

​​​​​The excess of cost of a company over the fair value of the net assets acquired - Goodwill.

A right to sell certain products or services or use of certain trademarks or trade names within a designated geographic area- Franchise.

Cost incurred by a company that often lead to patents on new products. These costs must be expensed as incurred - Research and development costs.

The allocation of the cost of a intangible asset to expense in a rational and systematic manner-Amortization.