Question

Midtown Pizza bought a used Ford delivery van on January 2, 2018, for $22,000. The van was expected to remain in service for four years (80,000 miles). At the end of its useful life, Midtown management estimated that the van's residual value would be $2,000. The van traveled 32,000 miles the first year, 28,000 miles the second year, 15,000 miles the third year, and 5,000 miles in the fourth year. Read the requirements. Requirement 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. For years with $0 depreciation, make sure to enter "0" in the appropriate column.) i Requirements - - X Year Straight-Line 2018 2019 2020 2021 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 Midtown prefer to use for income tax purposes? Explain your reasoning in detail. Total

Answer 1

required 1 year 2018 2019 $ Straight line unit of production Double declining 5,000 8,000 11,000 5,000 7,000 5,500 5,000 $ 3,750 2,750 5,000 1,250 20,000 $ 20,000 $ 20,000 2020 2021 750 total

required 2 Best method = Unit of production method required 3 For income tax purpose: prefer Double declining method because it provoeds the most depreciation and thus largest tax deduction at the early life of the asset

22,000 (2,000) 20,000 working notes Straight line Total cost of the Van $ Less: Residual value Depreciable value $ Usefull life Straight line depreciation $ year 2018 2019 2020 $ 2021 16700 S 5,000 (20000/4) Straight line 5,000 5,000 5,000 5,000 5,000

unit of production best tracks wear and tear $ $ Total cost of the van Less: Residual value Depreciable value Total Miles depreciation per mile 22,000 2,000) 20,000 80,000 0.25 (20000 /80000) $ Year per mile Depreciation 2018 $ 0.25 2019 s 0.25 mile 32,000 28,000 15,000 5,000 80,000 8000 7000 3750 2020 $ 2021 $ $ 0.25 1250 20000

Double declining 25% Straight line rate 1/4 - Double decline rate 25% x 2= 50% Year opening value 50% 2018 $ 2019 $ 2020 $ 2021 $ 22,000 11,000 5,500 2,750 2750-2000 Depreciation ening value B=A x 50% |C=A-B 11000 $ 11,000 5500 $ 5,500 2750 $ 2,750 750 $ 2,000 50% 50% 20000