Question

Determine the annual depreciation expense for an automobile for the years 2010-2013

Demonstration Problem 8-1 On January 1, 2010, Sanders Rental Company (SRC) paid cash to purchase an automobile. The car dealer gave SRC a $1,000 cash discount off the $19,000 list price. However, SRC paid an additional $2,000 to equip the automobile with a more luxurious interior so it would have greater appeal to his clientele. SRC expects the automobile to have a four-year useful life and to lease it for 100,000 miles before disposing of it. SRC also estimates a $4,000 salvage value. SRC leased the automobile to a customer who drove it 30,000: 10,000; 40,000; and 25,000 miles during 2010, 2011, 2012, and 2013, respectively. Required Compute the annual depreciation expense for the automobile for years 2010 through 2013 by completing the format provided and the following depreciation methods. a. Straight-line b. Double-declining balance c. Units of production

Answer 1

Answer is given below with working notes

Depreciation Expense Year Straight Line Units of Production Double Declining Balance $10,000 $5,000 $1,000 2010 2011 2012 2013 Totals $4,000 $4,000 $4,000 $4,000 $16,000 $4,571 $1,524 $6,095 $3,810 $16,000 So $16,000 Cost of Automobile List price Less: Discount Add: Additional cost for interiors Total cost of asset $19,000 $1,000 $2,000 $20,000 Calculations a) Straight Line method Cost Residual value $20,000 $4,000 Years Yearly Depreciation $4,000 7 4 Double declining balance method Opening Year Rate Balance 2010 $20,000 50.00% 2011 $10,000 50.00% 2012 $5,000 2013 Yearly Depreciation $10,000 $5,000 $1,000 Closing balance $10,000 $5,000 $4,000 Year 3 Depreciation will be $1,000 to keep Residual value as balance b) Double Declining method working number of years useful life Depreciation rate of automobile (1/number of years) DDB Depreciation rate 25.00% 50.00% (25% * 2) c) Units of Production Method Cost Total Miles Residual value $4,000 Rate Per mile $0.1524 $20,000 105,000 Year Rate 2010 2011 $0.1524 $0.1524 $0.1524 $0.1524 Operating miles 30,000 10,000 40,000 25,000 Yearly Depreciation $4,571 $1,524 $6,095 $3,810 2012 2013