Question

During the first two years, Supplies, Inc. drove the company truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck for $175,000. If the truck has an estimated life of 10 years or 300,000 miles, and an estimated residual value of $25,000, what amount of depreciation expense should Supplies, Inc. record in the second year using the activity-based method?

Answer 1

$11,000

Step-by-step explanation:

The computation of the depreciation expense for the second year is shown below:

For this computation, first we have to determine depreciation rate per mile which is presented below:

= (Original cost - residual value) ÷ (estimated miles)

= ($175,000 - $25,000) ÷ ($300,000 miles)

= ($150,000) ÷ ($300,000 miles)

= $0.5 per miles

Now for the second year, it would be

= Production units in second year × depreciation per miles

= 22,000 miles × $0.5

= $11,000