Question

On January 1, Year 1, the City Taxi Company purchased a new taxi cab for $48,000. The cab has an expected salvage value of $10,000. The company estimates that the cab will be driven 200,000 miles over its life. It uses the units-of-production method to determine depreciation expense. The cab was driven 57,000 miles the first year and 60,000 the second year. What is the amount of depreciation expense reported on the Year 2 income statement and the book value of the taxi at the end of Year 2, respectively? (Do not round intermediate calculations.)

Multiple Choice

• $11,400 and $15,770

• $14,400 and $19,920

• $11,400 and $25,770

• $14,400 and $9,920

Answer 1

Answer: $11,400 and $25,770

.

Depreciation per mile = (Cost - Salvage value) / Estimated number of miles

= ($48,000 - $10,000) / 200,000

= $0.19 per mile

.

Depreciation for 1st year = Depreciation per mile x Miles driven during 1st year = $0.19 x 57,000 = $10,830

Depreciation for 2nd year = Depreciation per mile x Miles driven during 2nd year = $0.19 x 60,000 = $11,400

.

Book value of the asset at the end of 2nd year = Cost of the asset - Accumulated depreciation

= $48,000 - ($10,830 + $11,400)

= $25,770