Question

On January 8, 2012, Speedway Delivery Service purchased a truck at a cost of $65,000. Before placing the truck in service, Speedway spent $4,000 painting it, $2,500 replacing tires, and $8,000 overhauling the engine. The truck should remain in service for five years and have a residual value of $6,000. The truck’s annual mileage is expected to be 22,000 miles in each of the first four years and 12,000 miles in the fifth year—100,000 miles in total. In deciding which depreciation method to use, David Greer, 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. Speedway 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 Speedway 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.

Answer 1

Answer:

Speedway Delivery Service

1. Depreciation Schedules:

Depreciation Schedule (Straight-line Method)

Date                         Cost Value   Depreciation  Accumulated   Net Book

                                                          Expense     Depreciation       Value

December 31, 2012    $79,500         $14,700         $14,700          $64,800

December 31, 2013    $79,500         $14,700        $29,400          $50,100

December 31, 2014    $79,500         $14,700         $44,100         $35,400

December 31, 2015    $79,500         $14,700        $58,800         $20,700

December 31, 2016    $79,500         $14,700        $73,500           $6,000

Depreciation Schedule (Units-of-production Method)

Date                         Cost Value   Depreciation  Accumulated   Net Book

                                                          Expense     Depreciation       Value

December 31, 2012    $79,500         $16,170          $16,170          $63,330

December 31, 2013    $79,500         $16,170        $32,340           $47,160

December 31, 2014    $79,500         $16,170         $48,510         $30,990

December 31, 2015    $79,500         $16,170        $64,680          $14,820

December 31, 2016    $79,500         $8,820        $73,500           $6,000

Depreciation Schedule (Double-declining-balance Method)

Date                         Cost Value   Depreciation  Accumulated   Net Book

                                                          Expense     Depreciation       Value

December 31, 2012    $79,500         $31,800        $31,800          $47,700

December 31, 2013    $79,500         $19,080       $50,880         $28,620

December 31, 2014    $79,500          $11,448       $62,328           $17,172

December 31, 2015    $79,500          $6,869        $69,197          $10,303

December 31, 2016    $79,500          $4,303       $73,500           $6,000

2. The straight-line method reports the highest net income in the early years while the double-declining-balance method minimizes the income taxes in the early years.

Explanation:

a) Data and Calculations:

January 8, 2012:

Purchase of a delivery truck = $65,000

Cost of painting the truck =         4,000

Cost of replacing the tires =        2,500

Cost of overhauling the engine  8,000

Total costs =                            $79,500

Residual value =                          6,000

Depreciable amount =           $73,500

Estimated useful life = 5 years

Straight-line depreciation Method:

Annual depreciation expense = $14,700 ($73,500/5)

Units-of-production Method:

Depreciation rate per mile = $0.735 ($73,500/100,000)

For 22,000 miles, depreciation expense = $16,170 ($0.735 * 22,000)

For 12 ,000 miles, depreciation expense = $8,820 ($0.735 * 12,000)

Double-declining-balance method:

Depreciation rate = 100/5 * 2 = 40%

First year's depreciation expense = $31,800 ($79,500 * 40%)

Declined balance = $47,700 ($79,500 - $31,800)

Second year's depreciation expense = $19,080 ($47,700 * 40%)

Declined balance = $28,620 ($47,700 - $19,080)

Third year's depreciation expense = $11,448 ($28,620 * 40%)

Declined balance = $17,172 ($28,620 - $11,448)

Fourth year's depreciation expense = $6,869 ($17,172 * 40%)

Declined balance = $10,303 ($17,172 - $6,869)

Fifth year's depreciation expense = $4,303 ($10,303 - $6,000)