P10-31A P10-31A Determining asset cost, preparing depreciation schedules (3 methods), and

P10-31A

P10-31A Determining asset cost, preparing depreciation schedules (3 methods), and
identifying depreciation results that meet management objectives.
On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of $100,000.
Before placing the truck in service, Rapid spent $3,000 painting it, $600 replacing tires,
and $10,400 overhauling the engine. The truck should remain in service for five years
and have a residual value of $12,000. The truck’s annual mileage is expected to be
32,000 miles in each of the first four years and 8,000 miles in the fifth year – 136,000
miles in total. In deciding which depreciation method to use, Andy Sargeant, 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. Rapid prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the depreciation method that meets the general manager’s objectives.
Solution:
Requirement 1
Purchase price of truck $ – 0
Add related costs:
Painting – 0
Tires – 0
Engine overhaul – 0 – 0
Total cost of truck $ – 0
hint: Depreciable cost = Cost – Residual value
Straight-Line Depreciation Schedule
Depreciation for the Year
Asset Depreciable Depreciation Depreciation Accumulated Book
Date Cost Cost Rate Expense Depreciation Value
1/3/18 $ 114,000 $ 114,000
$ – 0 1/5 $ – 0 $ – 0 $ – 0
$ – 0 1/5 $ – 0 $ – 0 $ – 0
$ – 0 1/5 $ – 0 $ – 0 $ – 0
$ – 0 1/5 $ – 0 $ – 0 $ – 0
$ – 0 1/5 $ – 0 $ – 0 $ – 0
Depreciation per unit = (Cost – Residual value) / Useful life in units
Units-of-Production Depreciation Schedule
Depreciation for the Year
Asset Depreciation Number Depreciation Accumulated Book
Date Cost per Unit of Units Expense Depreciation Value
1/3/18 $ 114,000 $ 114,000
$ – 0 – 0 $ – 0 $ – 0 $ – 0
$ – 0 – 0 $ – 0 $ – 0 $ – 0
$ – 0 – 0 $ – 0 $ – 0 $ – 0
$ – 0 – 0 $ – 0 $ – 0 $ – 0
$ – 0 – 0 $ – 0 $ – 0 $ – 0
*Note – 12/31/18 Depreciation Expense is $24,000
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Asset Book Value DDB Depreciation Accumulated Book
Date Cost Rate Expense Depreciation Value
1/3/18 $ 114,000 $ 114,000
$ – 0 2 x (1/5) $ – 0 $ – 0 $ – 0
$ – 0 2 x (1/5) $ – 0 $ – 0 $ – 0
$ – 0 2 x (1/5) $ – 0 $ – 0 $ – 0
$ – 0 2 x (1/5) $ – 0 $ – 0 $ – 0
$ – 0 2 x (1/5) $ – 0 $ – 0 $ – 0
*HINT- 5th year depreciation is the “plug figure” needed to reduce book value to
residual value
Requirement 2

&”Arial,Bold”&12HORNGREN’S ACCOUNTING – 12th Edition

&”Arial,Bold”&10Chapter 10: Plant Assets, Natural Resources, and Intangibles &”Arial,Bold”&10Page &P of &N

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