Question

PY-SIH (SI 10) 3 Question Help On January 1, 2018, Brisk Delivery Service purchased a truck at a cost of $67.000. Before placing the truck in service, Brisk spent $4,000 painting it, $2,500 replacing tires, and $1,200 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100. The truck's annual mileage is expected to be 20.000 miles in each of the first four years and 12,800 miles in the fifth year-92,800 miles in total In deciding which depreciation method to use, Carl Thomas, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance) Read the requirements 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.

Answer 1

Purchase Cost $67,000 Add: Painting Cost $4,000 Add: Replacing Tyres Add: Engine Overhaul $2,500 $1,200 Total Cost of truck $74,700 Salvage Value Useful Life (in years) $5,100 5 Ans 1a Straight Line Depreciation Schedule Straight line depreciation (Initial Cost-Salvage Value)/ Estimated useful life Depreciation for the year Depreciation Accumulated Actual Cost Depreciable Cost Useful Life Book Value Year Depreciation Expense 1-01-2018 12-31-2018 $74,700 $69,600 $13,920 $13,920 $60,780 5 = 12-31-2019 $55,680/ $13,920 $27,840 $46,860 4 = 12-31-2020 $41,760 $13,920 $41,760 $32,940 3= 12-31-2021 $27,840 $13,920 $55,680 $19,020 2= 12-31-2022 $13,920 $13,920 $69,600 $5,100 1=

Ans 1b Unit of Production depreciation Estimated operate 92800 miles (Initial Cost-Salvage Value)/ Estimated units production Depreciation per unit [($74700-$5100)/92800] $ 0.75 per miles Depreciation for the year Depreciable Per Number of Depreciation Accumulated Book Value Actual Cost Date Unit units Depreciation Expense (A) (C) (A) (B) (C) 1-02-2018 $74,700 12-31-2018 s0.75 x $15,000 $15,000 $59,700 20000 12-31-2019 $0.75 x 20000 $15,000 $30,000 $44,700 12-31-2020 $0.75 x $15,000 $45,000 $29,700 20000 12-31-2021 $.75 x 20000 $15,000 $60,000 $14,700 12-31-2022 $0.75 x 12800 $9,600 $69,600 $5,100 Ans 1c Double Declining Balance Method (DDBM) 2/Useful Life Book Value Depreciation for the year Depreciation Accumulated Book Value Date Actual Cost Book Value DDB rate Depreciation Expense $74,700 1 $74,700 x $29,880 $29,880 $44,820 0.4 $44,820 x $17,928 $47,808 $26,892 2 0.4 $26,892 x $10,757 $58,565 $16,135 3 0.4 $9,681 $16,135 x $6,454 $65,019 4 0.4 $9,681 x $3,872 $68,891 $5,809 0.4

Based on the above working, Fast should use Straight Line Depreciation Method so that the company reports Ans 2 highest net income as because the depreciation expense is lower than the unit of production method and double declining balance method. Lower depreciation will result in higher net income