Homer Corporation acquired a new truck on January 1, 2017. It was expected to be used for 500,000 miles and its estimated useful life is 10 years. Total cost was $200,000; salvage value was estimated to be $60,000. Homer employs a calendar year for financial reporting purposes and computes depreciation to the nearest whole month. Actual miles driven for the first 3 years are as follows: 2017: 10,000 miles 2018: 50,500 miles 2019: 42,500 miles A. Compute the depreciation expense reported by Homer for the truck for the year 2018 under the following depreciation methods units-of-production (activity) straight line sum-of-the-years-digits double declining balance B. Now assume that the truck was placed in operation on October 1, 2017. Compute the depreciation expense reported for the year 2018 under the sum-of-the-years-digits method.
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.
Homer Corporation acquired a new truck on January 1, 2017. It was expected to be used for 500,000 miles and its estimated useful life is 10 years. Total cost was $200,000; salvage value was estimated to be $60,000. Homer employs a calendar year for financial reporting purposes and computes
2017: 10,000 miles
2018: 50,500 miles
2019: 42,500 miles
A. Compute the depreciation expense reported by Homer for the truck for the year 2018 under the following depreciation methods
- units-of-production (activity)
- straight line
- sum-of-the-years-digits
- double declining balance
B. Now assume that the truck was placed in operation on October 1, 2017. Compute the depreciation expense reported for the year 2018 under the sum-of-the-years-digits method.
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