Question

Sunland Taxi Service uses the units-of-activity method in computing depreciation on its taxicabs. Each cab is expected to be driven 148,000 miles. Taxi no. 10 cost $38,000 and is expected to have a salvage value of $1,000. Taxi no. 10 is driven 28,500 miles in year 1 and 21,500 miles in year 2.

a. Calculate depreciation cost per mile using unit-of-activity method. (Round answer to 2 decimal places, e.g. 0.50.)

Depreciation cost: $______ per mile

b. Compute the depreciation for each year. (Round answers to 0 decimal places, e.g. 125.)

Depreciation:

Year 1: $ ________

Year 2: $_________

Answer 1

Answer to Part a.

Depreciation Cost per Activity = (Cost – Salvage Value) / Estimated Activity during lifetime
Cost = $38,000
Salvage Value = $1,000
Estimated Activity during lifetime = 148,000 Miles

Depreciation Cost per mile = (38,000 – 1,000) / 148,000
Depreciation Cost per mile = 37,000 / 148,000
Depreciation Cost = $0.25 per Mile

Answer to Part b.

Year 1:
Mile driven during Year 1 = 28,500 Miles
Depreciation Expense for Year 1 = 28,500 * $0.25
Depreciation Expense for Year 1 = $7,125

Year 2:
Mile driven during Year 2 = 21,500 Miles
Depreciation Expense for Year 2 = 21,500 * $0.25
Depreciation Expense for Year 2 = $5,375