Question

On January 1, 2019, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an estimated 6-year life and a $4,000 residual value. Wasson uses the units-of-production depreciation method and Wasson estimates that the vehicle will be driven 100,000 miles. What is the vehicle's book value as of December 31, 2020, assuming the vehicle was driven 10,000 miles during 2019 and driven 18,000 miles during 2020?
A. $29,920.
B. $28,800.
C. $24,800.
D. $25,920.

Answer 1

Answer:

option (A) $29,920

Explanation:

Data provided in the question;

Purchasing cost = $40,000

Estimated life = 6 years

Salvage value = $4,000

Estimated driving life = 100,000

Vehicle driven in total till 2020 = 10,000 + 18,000 = 28,000

Now,

Using the units-of-production depreciation method

Total depreciation till 2020 = $\frac{\textup{Purchasing cost - Salvage value}}{\textup{Estimated driving life}}\times\textup{Total distance driven}$

or

Total depreciation till 2020 = $\frac{\textup{40,000 - 4,000}}{\textup{100,000}}\times\textup{28,000}$

or

Total depreciation till 2020 = $10,080

Thus,

Book value on December 31, 2020 = Purchasing cost - Depreciation

= $40,000 - $10,080

= $29,920

Hence,

The correct answer is option (A) $29,920