Option #1: Computing and Recording Depreciation
Two Brother's Moving Company purchased a group of new moving trucks for a total amount of $125,000. The vehicles are expected to last five years due to the heavy use and have a residual/scrap/salvage value of $10,000 at the end of that life. Usage of the vehicle is tracked in miles and the vehicles in total are expected to last 2,000,000 miles. During year one 750,000 miles were used, during year two 600,000 miles were used, during year three 500,000 miles were used, during year four no miles were used due to a temporary closing of the moving line of business, and during year five 150,000 miles were used. Using the depreciation template provided, determine the amount of depreciation expense for the third year under each of the following assumptions:
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The depreciation expense for the third year: | ||||||
a) Straight Line Method = cost - salvage / number of years of service | ||||||
SLM = 125000-10000 /5 YEARS = $23000 every year including third year. | ||||||
b) Units of production Method = (Year units/Life units)*(cost -salvage) | ||||||
UPM = (500000//2000000)* (125000-10000)=$28750 for third year | ||||||
c) Double declining Balance Method= | ||||||
year | Rate | dep (of previous carrying value) | carrying amount | |||
0 | 125000 | |||||
1 | 20%*2=40% | 50000 | 75000 | |||
2 | 30000 | 45000 | ||||
3 | 18000 | 27000 | ||||
THIRD YEAR'S DEP. EXP. THROUGH DDB METHOD =$18000 | ||||||
d) Journal entry: | ||||||
Debit | Cash | 50000 | ||||
Debit | Accumulated Dep.-MT | 92000 | ||||
Credit | Moving trucks | 125000 | ||||
Credit | Income of sale of trucks | 17000 | ||||
(being trucks sold at $50000 at the end of 4th year) | ||||||
e) Being the chief accountant of the company, my decision would be on the Units of production | ||||||
method of depreciation because as generally SLM is being used in | ||||||
industry for depreciation purpose, but if the per year usage is available for | ||||||
the whole life of asset then Units of production method is much better. | ||||||
The concept behind this decision is that a year should be loaded with only | ||||||
that part of the asset cost in proportion to value of assets used. | ||||||
If assets is used less, less depreciation should be levied against the revenues and vice-versa if more asset is used. |
Option #1: Computing and Recording Depreciation Two Brother's Moving Company purchased a group of new moving...
Option #1: Computing and Recording
Depreciation
Two Brother's Moving Company purchased a group of new moving
trucks for a total amount of $125,000. The vehicles are expected to
last five years due to the heavy use and have a
residual/scrap/salvage value of $10,000 at the end of that life.
Usage of the vehicle is tracked in miles and the vehicles in total
are expected to last 2,000,000 miles. During year one 750,000 miles
were used, during year two 600,000 miles...
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