During the current year, Airport Auto Rentals purchased 60 new automobiles at a cost of $14,000per car. The cars will be sold to a wholesaler at an estimated $5,000 each as soon as they have beendriven 50,000 miles. Airport Auto Rentals computes depreciation expense on its automobiles bythe units-of-output method, based on mileage.a. Compute the amount of depreciation to be recognized for each mile that a rental automobile isdriven.b. Assuming that the 60 rental cars are driven a total of 1,770,000 miles during the current year,compute the total amount of depreciation expense that Airport Auto Rentals should recognizeon this fleet of cars for the year.c. In this particular situation, do you believe the units-of-output depreciation method achieves abetter matching of expenses with revenue than would the straight-line method? Explain.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
During the current year, Airport Auto Rentals purchased 60 new automobiles at a cost of $14,000
per car. The cars will be sold to a wholesaler at an estimated $5,000 each as soon as they have been
driven 50,000 miles. Airport Auto Rentals computes
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 1,770,000 miles during the current year,
compute the total amount of depreciation expense that Airport Auto Rentals should recognize
on this fleet of cars for the year.
c. In this particular situation, do you believe the units-of-output depreciation method achieves a
better matching of expenses with revenue than would the straight-line method? Explain.
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