Question

Piccadiliy Pizza bought a used Ford delivery van on January 2, 2021, for $19,200. The van was expected to remain in service for four years (71,200 miles). At the end of its useful life, Piccadilly management estimated that the van's residual value would be $1,400. The van traveled 28,000 miles the first year, 20,500 miles the second year, 18,500 miles the third year, and 4,200 miles in the fourth year. Read the requirements. Requirement 1. Prepare a schedule of depreciation expense per year for the van under the throe depreciation methods. Prepare a schedule of depreclation expense per year for the van under the straight-line method. (Complete all input fiolds. Enter a 0 for any zero balances.) Requirements 1. Prepare a schedule of depreciation expense per year for the van under the three depreciation methods. (For units-of-production and double-declining-balance methods, round to the nearest two decimal places after each step of the calculation.) 2. Which method best tracks the wear and tear on the van? 3. Which method would Piccadilly prefer to use for income tax purposes? Explain your reasoning in detail.

Answer 1

To calculate depreciation expense for the van, apply straight-line, units-of-production, and double-declining-balance methods. Units-of-production best matches usage while double-declining-balance is preferred for tax benefits.

Step-by-step explanation:

To prepare a schedule of depreciation expense per year for the van under the three depreciation methods, we must calculate the expenses using the straight-line, units-of-production, and double-declining-balance methods.

Straight-line method:

• Cost of van: $19,200
• Residual value: $1,400
• Useful life: 4 years
• Annual depreciation expense: ($19,200 - $1,400) / 4 = $4,450 per year

Units-of-production method:

• Total miles expected to be driven: 71,200 miles
• Depreciation per mile: ($19,200 - $1,400) / 71,200 = $0.25 per mile
• Years 1-4 depreciation expenses: 28,000 miles * $0.25, 20,500 miles * $0.25, 18,500 miles * $0.25, and 4,200 miles * $0.25, respectively

Double-declining-balance method:

• Double the straight-line rate: 2 * (1/4) = 50% per year
• Calculate the annual depreciation expense based on the remaining book value each year, not going below residual value.

Comparing the methods, the units-of-production method best tracks the wear and tear on the van since it correlates directly to usage.

For income tax purposes, Piccadilly may prefer using the double-declining-balance method because it results in higher depreciation expense and lower taxable income in the initial years of the asset's life.