Question

A company has just invested in a fleet of 12 new delivery trucks. They are identical in terms of features, capability, and price. The companies operation involves deliveries to

long haul' destinations, and 'short haul' destinations. The company assumes each truck to have a useful life of 5 years. Experience has shown that the 'long haul' trucks typically

develop problems, or wear out, twice as fast as the 'short haul' trucks, primarily due to the significantly higher number of miles driven each year. The trucks cost $195,000 per

truck. The 'Kelley Blue Book' value for these trucks in five years time will be $20,000. The company will use 4 of the new trucks as 'long haul', and the remainder as 'short haul'

vehicles. The accountants feel it is appropriate to depreciate the vehicles at different rates, due to their different usage levels.

Set up a depreciation schedule for the 'long haul' and 'short haul' trucks, choosing a depreciation method you feel is appropriate. Comment on your rationale for selecting the

method you did for each truck type. Make sure to state all assumptions or estimates.

Show the accounting entries that would be required to represent vehicle depreciation in the companies books.   Will any accounting adjustments be required if the trucks that

were just purchased are still being used 8 years from now?

Answer 1

the long haul truck needs to be depriciated by the sum of the digits depriciation:

short haul truck needs to be depriciated by the straight line method: because the rate at which the short haul is depricated is low.

the accounting equation for these trucks are as follows: original cost-salvage value/number of years

( 195000-20000)/5 = 35000

so the accounting entries will be 35000 for five years.

the sum of digits deprication: we choose this method because the rate at which it is depriciating is more than the straight line but less than the diminshing balance method.

the number of years of useful life is (5+4+3+2+1)=15

so for the first year the amount of deprication :5/15*35000(amount of depriciation charged by straight line method)

11667

2nd year :4/15*35000

9333

3rd year :3/15*35000

7000

2nd year 2/15*35000

4667

1st year 2333