Question

Fabian Woodworks

This company purchased a truck at a cost of $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, 2012, and was used 27,000 hours in 2012 and 26,000 hours in 2013.

Refer to Fabian Woodworks. What amount will be reported as depreciation expense over the 5-year life of the equipment?

1A. A. $4,000

B. $8,000

C. $12,000

D. $10,000

1B. Refer to Fabian Woodworks. Based on the information presented above, what method of depreciation will maximize depreciation expense in 2012?

A. Straight-Line

B. Double-Declining Balance

C. Units - of production

D. All methods produce the same expense in 2012

1C. Refer to Fabian Woodworks. If the company uses the straight-line method of depreciation, what is the book value at December 31, 2014 (after 3 years)?

A. $6,000

B. $10,000

C. $8,000

D. $4,000

1D. Refer to Fabian Woodworks. If the company uses the units-of-production method, what is the depreciation rate per hour for the equipment?

A. $1.00

B. $1.10

C. $0.10

D. $0.12

Answer 1

1A) Reported depriciatob expense over 5 years would be the total cost of machine as reduced by its salvage value.

Thus in this case it would be $10,000 ($12,000 - $2,000)

1B) Double declining balance.

Under staright line method the depreciation would be $2,000 per year ($10,000 /5)

Under double declining method it would be $4,000 ($2,000 *2)

Under units of production it would be $2,700 (10,000*27,000/100,000)

1C) $4,000

The depreciation for 3 years would be $6,000 ($2,000 *3), hence the book value would be $10,000 - $6,000 = $4,000

1D) $0.10

Depreciation per hour = (Cost - Salvage value) / Estimated total hours of operation

= ($12,000 - $2,000) / 100,000

= $0.10