Question

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:

1. The company uses the straight-line method of depreciation.
2. The company uses the units-of-production method of depreciation.
3. The company uses the double-declining-balance method of depreciation.

1. Assuming straight line depreciation, prepare the journal entry for the third year.
2. Assume the company sold the vehicles at the end of the fourth year for $50,000. Prepare a journal entry for asset disposal in the fourth year.
3. Assume you are the chief accountant of this company. Determine how you will choose, based on best industry practices, the depreciation method for them to use.
   ACT300 Prinoiples of AoLoutning Module E: Cutioal Thinking Template Uption 1(Depreeiation Template] Input amounts Recond journal entry for depreciation ezpene For the third year: Savage value Deprecisble cost Useful Ife Useful lfe in units ol 50 0 eats Dec 31 Depreciation Experse Accumuated Deprecistion-Eq orecord ennuel deprecistion Record journal entry for asset disposal in the lourth gear Straight line method Fomda COSt-SPlvape ValDepreeiable eost Cost- Salwage Value Deo. 31 Cash Pecuaed Dpreclation Loss on disposal Equpmem To record disposal of equipment Also, compute the-straight line depreciation rate. The formula is 100% divided by the useful life in gears Compure the straige line depteonae below 02 Depreei Depreciat Depreciat Aceumula Boo ear1 Year 2 Yeer 3 0 Year4 Straight-Line Depreciation Units-of-Production Double-Declining Balance eady
   

Answer 1

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.