Question

Three different companies each purchased trucks on January 1, Year 1, for $50,000. Each truck was expected to last four years or 200,000 miles. Salvage value was estimated to be $5,000. All three trucks were driven 66,000 miles in Year 1, 42,000 miles in Year 2, 40,000 miles in Year 3, and 60,000 miles in Year 4. Each of the three companies earned $40,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes. b-1. Calculate the net income for Year 4. b-2. Which company will report the lowest amount of net income for Year 4?

Answer 1

Solution:

b-1.

	A	B	C
Cash Revenue	$40,000	$40,000	$40,000
Less : depreciation	$11,250	$6,250	$13,500
net income	$28,750	$33,750	$26,500

working: depreciation

A = ($50,000- $5,000) / 4 = $11,250

B  double-declining- rate = 2 x 1/4 = 50%

year 1 depreciation = $50,000 x 50% = $25,000

year 2 depreciation = $25,000 x 50% = $12,500

year 3 depreciation = $12,500 x 50% = $12,500

year 4 depreciation = $12,500 x 50% = $6,250

C = ($50,000-$5,000) x 60,000 / 200,000 = $13,500

b-2. company C will report the lowest amount of net income for Year 4