January 1, 2021, Rainbow Company paid cash to purchase an automobile. The car dealer gave Rainbow a $3,000 cash discount off the $31,000 list price. However, Rainbow paid an additional $5,000 to equip the car with a more luxurious interior and high tech lighting so it would have greater appeal. Rainbow Company expected the car to have a five-year useful life and a $5,000 salvage value. Rainbow also expected to use the car for 140,000 miles before disposing of it. Rainbow used the car, and it was driven 20,000 / 30,000 / 40,000 / 30,000 / 20,000 miles during each use year respectively. Rainbow sold the car on January 1, 2027, for $6,000 cash. (SHOW ALL CALCULATIONS) show your work. What is the cost of the car that Rainbow Company will record? 2. Under the straight line method of depreciation, how much depreciation expense will Rainbow have each year of the car’s use? 3Under the double declining balance method of depreciation (a) What is the percentage depreciation Rainbow will use?
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.
On January 1, 2021, Rainbow Company paid cash to purchase an automobile. The car dealer gave Rainbow a $3,000 cash discount off the $31,000 list price. However, Rainbow paid an additional $5,000 to equip the car with a more luxurious interior and high tech lighting so it would have greater appeal. Rainbow Company expected the car to have a five-year useful life and a $5,000 salvage value. Rainbow also expected to use the car for 140,000 miles before disposing of it. Rainbow used the car, and it was driven 20,000 / 30,000 / 40,000 / 30,000 / 20,000 miles during each use year respectively. Rainbow sold the car on January 1, 2027, for $6,000 cash. (SHOW ALL CALCULATIONS) show your work.
- What is the cost of the car that Rainbow Company will record?
2. Under the
3Under the double declining balance method of depreciation
(a) What is the percentage depreciation Rainbow will use?
(b) At the end of the first year, how much depreciation expense will Rainbow have for the car?
(c) At the end of the first year, what will be the book value the car?
(d) At the end of the second year, how much depreciation expense will Rainbow have for the car?
(e) At the end of the second year, what will be the book value the car?
4.Under the
(a) How much depreciation will Rainbow have for each mile driven of the car?
(b) How much depreciation expense will Rainbow have in the last three years under this method?
5. When Rainbow sold the car, what did it recognize as a gain or loss and for how much? Show calculation in proper format and put into the
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