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Expert-verified Found in: Page 535 ### Horngren'S Financial And Managerial Accounting

Book edition 6th
Author(s) Tracie L. Miller-Nobles, Brenda L. Mattison
Pages 992 pages
ISBN 9780134486833

# Question: Determining asset cost, preparing depreciation schedules (3 methods), and identifying depreciation results that meet management objectivesOn January 3, 2018, Speedy Delivery Service purchased a truck at a cost of $67,000. Before placing the truck in service, Speedy spent$3,000 painting it, $1,200 replacing tires, and$3,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100. The truck’s annual mileage is expected to be 20,000 miles in each of the first four years and 12,800 miles in the fifth year—92,800 miles in total. In deciding which depreciation method to use, Alec Rivera, 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. Speedy 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 Speedy uses the truck. Identify the depreciation method that meets the company’s objectives. Answer The business entity must elect the straight-line method to meet the objective. See the step by step solution ### Step by Step Solution ## Step 1: Definition of Straight-Line Method The method of calculating the depreciation under which each year of the useful life of the asset reports the same depreciation is known as the straight-line method. The depreciation method under this method is calculated using salvage value, cost, and useful life. ## Step 2: Depreciation schedule a. Depreciation schedule by the straight-line method  Date Asset Cost Depreciation Expenses AccumulatedDepreciation Book Value 03-1-2018$74,700 12-31-2018 $74,700$13,920 $13,920$60,780 12-31-2019 $60,780$13,920 $27,840$46,860 12-31-2020 $46,860$13,920 $41,760$32,940 12-31-2021 $32,940$13,920 $55,680$19,020 12-31-2022 $19,020$13,920 $69,600$5,100

Working notes:

1. Calculation of total cost of truck 2. Calculation of depreciation amount by the straight-line method 2. Depreciation schedule by Units of production method

 Date Cost Depreciation expenses Accumulated Depreciation Book Value 03-1-2018 $74,700 12-31-2018$74,700 $15,000$15,000 $59,700 12-31-2019$59,700 $15,000$30,000 $44,700 12-31-2020$44,700 $15,000$45,000 $29,700 12-31-2021$29,700 $15,000$60,000 $14,700 12-31-2022$14,700 $9,600$69,600 $5,100 Working notes: 1. Calculation of depreciation by units of production method c. Depreciation schedule by double-declining balance method  Date Opening value depreciable base Depreciation rate Depreciation expenses Accumulated depreciation Book Value 03-1-2018$74,700 $74,700 12-31-2018$74,700 40% $29,880$29,880 $44,820 12-31-2019$44,820 40% $17,928$47,808 $26,892 12-31-2020$26,892 40% $10,756.8$58,564.8 $16,135.2 12-31-2021$16,135.2 40% $6,454.08$65,018.88 $9,681.12 12-31-2022$9,681.12 40% $3,872.448$68,891.33 \$5,808.672 ## Step 3: Depreciation method meeting the company’s objective

The lowest depreciation in the initial years is reported under a straight-line method that will give a higher net income. Therefore, the business entity must elect the straight-line method to achieve the objective ### Want to see more solutions like these? 