Question

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 journal entry to 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 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 two years that Rapid uses the truck. Identify the depreciation method that meets the company’s objectives.

3. Assume that the company sold the truck for $45,000 at end of the third year (12/31/20). The company used the double declining balance method of depreciation.

   a) Compute the gain or loss on sale

   

    b) Prepare the journal entry to record the sale transaction.

Answer 1

1.)	Straight Line
	Year	Opening Balance	Depreciable Amount	Life	Depreciation Expense	Accumulated Depreciation	Assets Book value
	2018	114,000	102,000	5	20,400	20,400	93,600
	2019	93,600	81,600	4	20,400	40,800	73,200
	2020	73,200	61,200	3	20,400	61,200	52,800
	2021	52,800	40,800	2	20,400	81,600	32,400
	2022	32,400	20,400	1	20,400	102,000	12,000
	Units of production
	Year	Opening Balance	Depreciable Amount	Units	Units Rate	Depreciation Expense	Accumulated Depreciation	Assets Book value
	2018	114,000	102,000	32,000	0.75	24,000	24,000	90,000
	2019	90,000	78,000	32,000	0.75	24,000	48,000	66,000
	2020	66,000	54,000	32,000	0.75	24,000	72,000	42,000
	2021	42,000	30,000	32,000	0.75	24,000	96,000	18,000
	2022	18,000	6,000	8,000	0.75	6,000	102,000	12,000
	Double Declining
	Year	Opening Balance	Depreciable Amount	Depreciation rate	Depreciation Expense	Accumulated Depreciation	Assets Book value
	2018	114,000	102,000	40%	45,600	45,600	68,400
	2019	68,400	56,400	40%	27,360	72,960	41,040
	2020	41,040	29,040	40%	16,416	89,376	24,624
	2021	24,624	12,624	40%	9,850	99,226	14,774
	2022	14,774	2,774	40%	2,774	102,000	12,000

2.)	Straight line is the depreciation method that reports the highest net income in the early years of asset use.

3.)
a)	Gain or loss on sale	$ 20,376	(45,000 - 24,624 )

b.)	Date	Account Titles	Debit $	Credit $
	12/31/20	Cash	45,000
		Accumulated Depreciation	89,376
		Truck		114,000
		Gain on sale of Truck		20,376