On January 1 2018 Fast Delivery Service purchased a truck at

On January 1, 2018, Fast Delivery Service purchased a truck at a cost of $62,000. Before placing the truck in service, Fast spent $2,200 painting it, $1,200 replacing tires, and $4,600 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,000. The truck\'s annual mileage is expected to be 28,000 miles in each of the first four years and 18,000 miles in the fifth year 130,000 miles in total. In deciding which depreciation method to use, Alec Rivera, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance) Requirement 1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. Begin by preparing a depreciation schedule using the straight-line method. Straight-Line Depreciation Schedule Depreciation for the Year Date Cost Cost Rate Expense Depreciation Value 1-1-2018 12-31-2018 12-31-2019 12-31-2020 12-31-2021 12-31-2022

Solution

Answer

Total Cost of the Truck = Purchase price + Painting Expense + Replacing tire cost + Overhauling engine cost

= 62,000 + 2,200 + 1,200 + 4,600

Total Cost of the Truck = $70,000

Salvage Value = $5,000

Useful Life = 5 Years

Straight Line Method

Depreciation Per year = (Cost – Salvage Value) / Useful Life

= (70,000 - 5,000) / 5

= $13,000 per year

Depreciable value = Cost – Salvage Value

= 65,000 (70,000 - 5000)

Depreciation Rate = (Depreciation per year / Depreciable value) * 100

= (13,000 / 65,000) *100

Depreciation Rate = 20%

Depreciation = Depreciation rate * Cost

Depreciation for the Year

Date

Asset Cost

Depreciable Cost

Depreciation Rate

Depreciation Expense

Accumulated Depreciation

Book Value

1/1/2018

70,000

         70,000

12/31/2018

              65,000

20%

              13,000

             13,000

         57,000

12/31/2019

              65,000

20%

              13,000

             26,000

         44,000

12/31/2020

              65,000

20%

              13,000

             39,000

         31,000

12/31/2021

              65,000

20%

              13,000

             52,000

         18,000

12/31/2022

              65,000

20%

              13,000

             65,000

            5,000

Units of Production Method

Depreciable value = Cost – Salvage Value

= 65,000 (70,000 - 5000)

Total Miles = 130,000

Depreciation = (Miles usage in that year / Total Miles) * Depreciable Value

Depreciation for the Year

Date

Asset Cost

Depreciable Cost

Miles

Depreciation Rate

Depreciation Expense

Accumulated Depreciation

Book Value

1/1/2018

70,000

           70,000

12/31/2018

              65,000

                28,000

28,000/130,000

             14,000

                14,000

           56,000

12/31/2019

              65,000

                28,000

28,000/130,000

             14,000

                28,000

           42,000

12/31/2020

              65,000

                28,000

28,000/130,000

             14,000

                42,000

           28,000

12/31/2021

              65,000

                28,000

28,000/130,000

             14,000

                56,000

           14,000

12/31/2022

              65,000

               18,000

18,000/130,000

               9,000

                65,000

             5,000

Total

             130,000

Double Declining Balance

Depreciation rate = 2 * Straight line depreciation rate

= 2 * 20%

Depreciation rate = 40%

Depreciation = Book Value * Depreciation Rate

Depreciation for the Year

Date

Asset Cost

Depreciable Cost

Book Value

Depreciation Rate

Depreciation Expense

Accumulated Depreciation

1/1/2018

70,000

       70,000.0

12/31/2018

                 65,000

       42,000.0

40%

         28,000.0

          28,000.0

12/31/2019

                 65,000

       25,200.0

40%

         16,800.0

          44,800.0

12/31/2020

                 65,000

       15,120.0

40%

         10,080.0

          54,880.0

12/31/2021

                 65,000

         9,072.0

40%

            6,048.0

          60,928.0

12/31/2022

                 65,000

         5,443.2

40%

            3,628.8

          64,556.8

		Depreciation for the Year
Date	Asset Cost	Depreciable Cost	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
1/1/2018	70,000					70,000
12/31/2018		65,000	20%	13,000	13,000	57,000
12/31/2019		65,000	20%	13,000	26,000	44,000
12/31/2020		65,000	20%	13,000	39,000	31,000
12/31/2021		65,000	20%	13,000	52,000	18,000
12/31/2022		65,000	20%	13,000	65,000	5,000