A company paid $17,000 for a vehicle that had an estimated useful life of 4 years, total capacity of 100,000 miles, and a residual value of $1,000. After 2 full years of using the vehicle (20,000 miles in Year 1 and 27,000 miles in Year 2), the company sold the vehicle for $6,000 and reported a loss on disposal of $3,480.Required:Determine the method of depreciation that was used by the company. (Show your work using all three methods.)
What will be an ideal response?
The company used the units-of-production method.
First, determine the book value at the time of the sale (end of Year 2).
Gain (Loss) on disposal = Proceeds from sale ? Book value at time of sale
Book value at time of sale = Proceeds from sale ? Gain (Loss) on disposal
= $6,000 ? ($3,480) = $9,480
Then, determine the accumulated depreciation at the time of the sale (end of Year 2).
Accumulated depreciation at time of sale (Year 2) = Cost ? Book value at time of sale
= $17,000 ? $9,480 = $7,520
Finally, determine which method produces Accumulated Depreciation in the amount of $7,520.
Straight-line method:
Annual depreciation expense = (Cost ? Residual value) × (1 ÷ Useful life)
= ($17,000 ? $1,000) × (1 ÷4) = $4,000
Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense
= $4,000 + $4,000 = $8,000
Units of production:
Annual depreciation expense = (Cost ? Residual Value) × (Actual miles during Year 1 ÷ Estimated total miles)
= ($17,000 ? $1,000) × (20,000 miles ÷ 100,000 miles) = $3,200
= ($17,000 ? $1,000) × (27,000 miles ÷ 100,000 miles) = $4,320
Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense
= $3,200 + $4,320 = $7,520
Double-declining balance:
Depreciation expense = Book value × (2 ÷ Useful life)
Depreciation expense = (Cost ? Accumulated depreciation) × (2 ÷ Useful life)
Year 1:
= ($17,000 ? $0) × 2/4 = $8,500
Year 2:
= ($17,000 ? $8,500) × 2/4 = $4,250
Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense
= $8,500 + $4,250 = $12,750
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