Chapter 9, Problem 9.31AP

Determining asset cost, recording first-year depreciation, and identifying depreciation results that meet management objectives

On January 3, 2016, Fast Delivery Service purchased a truck at a cost of $62,000. Before placing the truck in service, Fast spent $3,000 painting it, $1,500 replacing tires, and $3,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,000. The truck’s annual mileage is expected to be 28,000 miles in each of the first four years and 18, 000 miles in the fifth year–130,000 miles in total. In deciding which depreciation method to use, Steven Kittridge, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).

Requirements

1. 1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
2. 2. Fast prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Fast uses the truck. Identify the depreciation method that meets the company’s objectives.