Question

Please help. The requirements are the questions. Thanks.

Piccadilly Pizza bought a used Ford delivery van on January 2, 2018, for $20,000. The van was expected to remain in service for four years (45,000 miles). At the end of its useful life, Piccadilly management estimated that the van's residual value would be $2,000. The van traveled 17,000 miles the first year, 18,000 miles the second year, 5,000 miles the third year, and 5,000 miles in the fourth year. Read the requirements Requirements - X three depreciation methods. (For units-of-production and Jof the calculation. For years with $0 depreciation, make sure to enter "0" in 1. Prepare a schedule of depreciation expense per year for the van under the three depreciation methods. (For units-of-production and double-declining-balance methods, round to the nearest two decimal places after each step of the calculation.) 2. Which method best tracks the wear and tear on the van? 3. Which method would Piccadilly prefer to use for income tax purposes? Explain your reasoning in detail.

Answer 1

Straight line method:	Depreciation = (20000-2000)/4
Year	Opening Balance	Depreciation expense	Closing balance
2018	20000	4500	15500
2019	15500	4500	11000
2020	11000	4500	6500
2021	6500	4500	2000

Units of production method
Year	Opening Balance	Depreciation expense	Depreciation expense	Closing balance
2018	20000	(17000/45000)*20000	7555.56	12444.44
2019	12444.44	(18000/45000)*20000	8000.00	4444.44
2020	4444.44	(5000/45000)*20000	2222.22	2222.22
2021	2222.22	Excess of residual value	222.22	2000.00

Double declining balance method	Depreciation percentage = 2*(100/4) = 50%
Year	Opening Balance	Depreciation expense	Depreciation expense	Closing balance
2018	20000	20000*50%	10000.00	10000.00
2019	10000.00	10000*50%	5000.00	5000.00
2020	5000.00	5000*50%	2500.00	2500.00
2021	2500.00	Excess of residual value	500.00	2000.00

b. To record the wear and tear of van exactly, it would be appropriate to use units-of-production method. Under this method, the depreciation expense is calculated by considering the actual usage against planned usage. Hence, this method correctly presents the wear and tear of the van.

c. For tax purposes, company would prefer units-of-production method or double declining balance method, as depreciation amounts are lower under these methods, compared with straight-line method.