Capitalized asset cost and first year depreciation, and identifying depreciation results that meet management objectives
On January 3, 2012, Trusty Delivery Service purchased a truck at a cost of $90,000. Before placing the truck in service, Trusty spent $3,000 painting it, $1,500 replacing tires, and $4,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $9,000. The truck's annual mileage is expected to be 22,500 miles in each of the first four years and 10,000 miles in the fifth year?100,000 miles in total. In deciding which depreciation method to use, Mikail Johnson, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).
1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
2. Trusty prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. For income tax purposes, the company uses the depreciation method that minimizes income taxes in the early years. Consider the first year that Trusty uses the truck. Identify the depreciation methods that meet the general manager's objectives, assuming the income tax authorities permit the use of any of the methods.
Solution is provided in a separate excel file attached in the following parts.
1 Calculation of Rate of deprecition and annual depreciation under Straight line Method
Table showing Amount of depreciation Expense recognized for 5 years using Straight line method
2 Calculation of depreciation rate under Units of production method:
Table showing Amount of depreciation Expense recognized for 5 years using units of production ...
Capitalized assets costs for depreciation are examined. The depreciation methods for schedules are examined.