P10-31A
| P10-31A Determining asset cost, preparing depreciation schedules (3 methods), and | ||||||||||
| identifying depreciation results that meet management objectives. | ||||||||||
| On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of $100,000. | ||||||||||
| Before placing the truck in service, Rapid spent $3,000 painting it, $600 replacing tires, | ||||||||||
| and $10,400 overhauling the engine. The truck should remain in service for five years | ||||||||||
| and have a residual value of $12,000. The truck’s annual mileage is expected to be | ||||||||||
| 32,000 miles in each of the first four years and 8,000 miles in the fifth year – 136,000 | ||||||||||
| miles in total. In deciding which depreciation method to use, Andy Sargeant, the general | ||||||||||
| manager, requests a depreciation schedule for each of the depreciation methods | ||||||||||
| (straight-line, units-of-production, and double-declining-balance). | ||||||||||
| Requirements | ||||||||||
| 1. | Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. | |||||||||
| 2. | Rapid prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the depreciation method that meets the general manager’s objectives. | |||||||||
| Solution: | ||||||||||
| Requirement 1 | ||||||||||
| Purchase price of truck | $ – 0 | |||||||||
| Add related costs: | ||||||||||
| Painting | – 0 | |||||||||
| Tires | – 0 | |||||||||
| Engine overhaul | – 0 | – 0 | ||||||||
| Total cost of truck | $ – 0 | |||||||||
| hint: Depreciable cost = Cost – Residual value | ||||||||||
| Straight-Line Depreciation Schedule | ||||||||||
| Depreciation for the Year | ||||||||||
| Asset | Depreciable | Depreciation | Depreciation | Accumulated | Book | |||||
| Date | Cost | Cost | Rate | Expense | Depreciation | Value | ||||
| 1/3/18 | $ 114,000 | $ 114,000 | ||||||||
| $ – 0 | 1/5 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 1/5 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 1/5 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 1/5 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 1/5 | $ – 0 | $ – 0 | $ – 0 | ||||||
| Depreciation per unit | = (Cost – Residual value) / Useful life in units | |||||||||
| Units-of-Production Depreciation Schedule | ||||||||||
| Depreciation for the Year | ||||||||||
| Asset | Depreciation | Number | Depreciation | Accumulated | Book | |||||
| Date | Cost | per Unit | of Units | Expense | Depreciation | Value | ||||
| 1/3/18 | $ 114,000 | $ 114,000 | ||||||||
| $ – 0 | – 0 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | – 0 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | – 0 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | – 0 | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | – 0 | $ – 0 | $ – 0 | $ – 0 | ||||||
| *Note – 12/31/18 Depreciation Expense is $24,000 | ||||||||||
| Double-Declining-Balance Depreciation Schedule | ||||||||||
| Depreciation for the Year | ||||||||||
| Asset | Book Value | DDB | Depreciation | Accumulated | Book | |||||
| Date | Cost | Rate | Expense | Depreciation | Value | |||||
| 1/3/18 | $ 114,000 | $ 114,000 | ||||||||
| $ – 0 | 2 x (1/5) | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 2 x (1/5) | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 2 x (1/5) | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 2 x (1/5) | $ – 0 | $ – 0 | $ – 0 | ||||||
| $ – 0 | 2 x (1/5) | $ – 0 | $ – 0 | $ – 0 | ||||||
| *HINT- 5th year depreciation is the “plug figure” needed to reduce book value to | ||||||||||
| residual value | ||||||||||
| Requirement 2 | ||||||||||
&”Arial,Bold”&12HORNGREN’S ACCOUNTING – 12th Edition
&”Arial,Bold”&10Chapter 10: Plant Assets, Natural Resources, and Intangibles &”Arial,Bold”&10Page &P of &N
