Question

During the first two years, Supplies, Inc. drove the company truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck for $175,000. If the truck has an estimated life of 10 years or 300,000 miles, with an estimated residual value of $25,000, what amount of deprecation expense should Supplies, Inc. record in the second year using the activity-based method?
A. $11,000.
B. $18,500.
C. $16,000.
D. $7,500.

Answer 1

Answer:

option (A) $11,000

Explanation:

Given;

Miles drove in first year = 15,000

Miles drove in second year = 22,000

Cost of the truck = $175,000

Residual value = $25,000

Estimated life = 10 years or 300,000 miles

Now,

using the activity based method

Rate of depreciation per mile driven = $\frac{\textup{Cost of truck - Residual value}}{\textup{Estimated life}}$

or

Rate of depreciation per mile driven = $\frac{\textup{175,000 - 25,000}}{\textup{300,000}}$

or

= $0.5 per mile

also,

Number of miles driven in second year = 22,000 miles

Hence,

Depreciation for the second year

= Depreciation rate × Number of miles driven in second year

= 0.5 × 22,000

= $11,000

Hence,

The correct answer is option (A) $11,000