(b) The ABC Puzzle company currently applies the straight-line depreciation method for a delivery truck that was purchased for €100,000 in on 1 Mar 2020 (useful life 5 years, salvage value €10,000). Your supervisor of the accounting department asks you to review the adopted accounting policy for the truck. In particular, he wants to know whether it would have been more reasonable for ABC company to adopt the units-of activity method instead, given that the ABC company wants to show a high net income in 2020. Assume that the delivery truck has €0,45 depreciable cost per mile and that miles will be driven as shown below: 2020 60,000 miles 2021 50,000 miles 2022 40,000 miles 30,000 miles 20,000 miles 2023 2024 Total 200,000 miles Calculate and compare the depreciation schedules for the straight-line and units-of-activity method over the entire useful life of the truck.
(b) The ABC Puzzle company currently applies the straight-line depreciation method for a delivery truck that was purchased for €100,000 in on 1 Mar 2020 (useful life 5 years, salvage value €10,000). Your supervisor of the accounting department asks you to review the adopted accounting policy for the truck. In particular, he wants to know whether it would have been more reasonable for ABC company to adopt the units-of activity method instead, given that the ABC company wants to show a high net income in 2020. Assume that the delivery truck has €0,45 depreciable cost per mile and that miles will be driven as shown below: 2020 60,000 miles 2021 50,000 miles 2022 40,000 miles 30,000 miles 20,000 miles 2023 2024 Total 200,000 miles Calculate and compare the depreciation schedules for the straight-line and units-of-activity method over the entire useful life of the truck.
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter2: The Accounting Information System
Section: Chapter Questions
Problem 63.1C
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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.
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