Question

Wildcats, Inc, purchased a ew truck on January 1, 2015, at a cost of $75,000. The truck's estimated useful life at the time of the purchase was 4 years, with an estimated salvage value of $5,000. The truck was estimated to have a production capacity of 20,000 units, with the expectation of production over the life as follows: 2015-5,000 units, 2016-4,000 units, 2017-4,000 units, 2018-7,000 units

Straight Line
Year	Depreciable Base	SL Rate	Annual Dep. Expense	Accumulated Depreciation	NBV
2015	70,000	0.25	17,500	17,500	57,500
2016	70,000	0.25	17,500	35,000	40,000
2017	70,000	0.25	17,500	52,500	22,500
2018	70,000	0.25	17,500	70,000	5,000

Accelerating Depreciation (Double Declining)
Year	NBV	2*SLR	Annual Dep. Expense	Accumulated Depreciation	NBV
2015	75,000	0.5	37,500	37,500	37,500
2016	37,500	0.5	18,750	56,250	18,750
2017	18,750	0.5	9,375	65,625	9,375
2018	9,375	0.5	4,375	70,000	5,000

Units of Production
Year	Expected Units of Production	Cost per Unit	Annual Dep. Expense	Accumulated Depreciation	NBV
2015	5000	3.5	17,500	17,500	57,500
2016	4000	3.5	14,000	31,500	43,500
2017	4000	3.5	14,000	45,500	29,500
2018	7000	3.5	24,500	70,000	5,000

A.) Assume Wildcats sells the truck on January 1, 2017 for $12,000 cash. Compute the resulting gain or loss from the sale using the straight line depreciation and record the journal entry to recognize the sale.

B.) Assume Wildcat sells the truck on January 1, 2018 for $25,000 cash. Compute the resulting gain or loss from the sale using the doubling declining depreciation and record the journal entry to recognize the sale.

C.) If you were the Wildcats CFO and you had a bonus based on net income what assumption or assumptions related to this truck could potentially be changed to maximize your bonus in 2015? Which method of depreciation would you prefer?

Answer 1

Answer

1.

Book Value on Jan 1, 2017 = $40,000

Sale Value = 12,000

Acc Depreciation = 35,000

Cash	12,000
Accumulated Depreciation	35,000
Loss on Sale (Bal.)	28,000
Asset (Truck)		75,000

2.

Book Value on Jan 1, 2018 = $9,375

Sale Value = 25,000

Acc Depreciation = 65,625

Cash	25,000
Accumulated Depreciation	65,625
Gain on Sale (Bal.)		15,625
Asset (Truck)		75,000

3.

I would like to choose the method which will have less depreciation amount in 2015 as it will result in less expense and more profit.

As we are talking about 2015, among these three I will choose Straight Line method or Units of production as both results in same depreciation expense of $17,500 in 2015.

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