Question

On January 1, 2010, Dragon Company paid cash to purchase an automobile. The car dealer gave Dragon a $1,000 cash discount off the $19,000 list price. However, Dragon paid an additional $2,000 to equip the car with a more luxurious interior so it would have greater appeal. Dragon Company expected the car to have a five-year useful life and a $5,000 salvage value. Dragon also expected to use the car for 150,000 miles before disposing of it. Dragon used the car, and it was driven 50,000 / 10,000 / 40,000 / 30,000 / 20,000 miles during each use year respectively. Dragon sold the car on January 1, 2015, for $4,500 cash.
Required:
a. What is the cost of the car that Dragon Company will record?
b. Under the straight line method of depreciation, how much depreciation expense will Dragon have each year of the car's use?

Answer 1

Answer:

a. $20,000

b. $3,000

Explanation:

The Cost of a Property, Plant and Equipment item includes, Purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to operate in the way management intended.

Calculation of the Cost of the Car

Purchase Price                              $19,000

Less Trade Discount                      ($1,000)

Net                                                  $18,000

Add Cost of luxurious interior        $2,000

Total Cost of the Car                    $20,000

Depreciation :

Straight line method of depreciation charges a fixed amount of expense to the Profit and loss during the period of use to reflect recovery of economic benefits.

Depreciation Charge (Straight line method ) = (Cost - Residual Value) / Estimated Useful Life

                                                                         = ($20,000 - $5,000) / 5

                                                                         =  $3,000

Therefore, the depreciation expense each year that the car is in use is $3,000.