Question

Required information [The following information applies to the questions displayed below.) Three different companies each purchased trucks on January 1, Year 1, for $62,000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $2,000. All three trucks were driven 75,000 miles in Year 1, 60,000 miles in Year 2, 50,000 miles in Year 3, and 70,000 miles in Year 4. Each of the three companies earned $51,000 of cash revenue during each of the four Years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes. b-1. Calculate the net income for Year 4. b-2. Which company will report the lowest amount of net income for Year 4? Complete this question by entering your answers in the tabs below. Required B1 Required B2 Calculate the net income for Year 4. (Round your "Per Unit Cost" to 3 decimal places.) Net Income Company A Company B Company C < Required B Required B2 >

Answer 1

Company A: Straight line method
Cost of Trucks	$               62,000
Less: Salvage value	$                 2,000
Depreciable Value	$               60,000
Divided by: Useful life	4
Depreciation per year	$               15,000
Company B: Double Decline method
Deprecation rate as per Straight line (1/4)	25.00%
Deprecation rate as per Double Decline method (25%*2)	50.00%
Cost of Trucks	$               62,000
Less: Depreciation in first year (62000*50%)	$               31,000
Book value at end of First year	$               31,000
Less: Depreciation in second Year (31000*50%)	$               15,500
Book value at end of second year	$               15,500
Less: Depreciation in third year (15500*50%)	$                 7,750
Book value at end of third year	$                 7,750
Less: Depreciation in fourth year (7750-2000)	$                 5,750
Book value at end of fourth year	$                 2,000
(Hint: Last year's depreciation is calculated by deducting the book value at the beginning of last year (here, Year 4) from the salvage value.
Company C: Units of production
Cost of Trucks	$               62,000
Less: Salvage value	$                 2,000
Depreciable Value	$               60,000
Divided by: Total miles	250,000
Depreciation per mile	$                 0.240
Expected miles used	250,000
Actual miles used during four year (75000+60000+50000+70000)	255,000
Actual miles used during four year is higher than expected miles used for four years. Therefore, miles for Year 4 is calculated by remainder miles.
Year 4 miles (250000-(75000+60000+50000))	65,000
Depreciation expense in Year 1 (75000*0.240)	$               18,000
Depreciation expense in Year 2 (60000*0.240)	$               14,400
Depreciation expense in Year 3 (50000*0.240)	$               12,000
Depreciation expense in Year 4 (65000*0.240)	$               15,600

	Straight line	Double Decline	Units of production
	Company A	Company B	Company C
Cash Revenue	$         51,000	$          51,000	$       51,000
Less: Depreciation for Year 4	$         15,000	$             5,750	$       15,600
Net Income	$         36,000	$          45,250	$       35,400
Company A			$       36,000
Company B			$       45,250
Company C			$       35,400
Company C will report the lowest amount of net income for Year 4.			Company C