Question

During the current year, Central Auto Rentals purchased 60 new automobiles at a cost of $11,840...

During the current year, Central Auto Rentals purchased 60 new automobiles at a cost of $11,840 per car. The cars will be sold to a wholesaler at an estimated $4,000 each as soon as they have been driven 56,000 miles. Central Auto Rentals computes depreciation expense on its automobiles by the units-of-output method, based on mileage.

a. Compute the amount of depreciation to be recognized for each mile that a rental automobile is driven.

b. Assuming that the 60 rental cars are driven a total of 1,680,000 miles during the current year, compute the total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year.

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Answer #1

Solution a:

Cost of car = $11,840

Expected residual value after they driver 56000 miles = $4,000

Depreciable cost = $11,840 - $4,000 = $7,840

Total estimated mileage during life of car =56000 miles

Depreciation expense per mile = Depreciable cost / Estimated mileage during life of car rental

= $7,840 / 56000 = $0.14 per mile

Solution b:

Total miles driven during the current year = 1680000 miles

Amount of depreciation expense, central auto rentals should recognize on this fleet of cars for the year

= Total miles driven * Depreciation per mile = 1680000 * $0.14 = $235,200

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