Question

Your friend Tom has decided to buy another vehicle for his business. It will cost $28,000. He plans to use it for 4 years and then sell it for about $8,000.

(a) Using a straight-line approach to recognizing use of the vehicle (depreciation), how much will be depreciated for each of the 4 years of use?
(b) He thinks a better way of recognizing use of the vehicle would be to use miles driven as a basis. He expects to put about 100,000 miles on the vehicle before he sells it, again for an estimated $8,0000. Based on these figures, how much will he depreciate for each mile driven?
(c) If he drives the vehicle 27,000 miles in the first year of use, how much will he recognize in depreciation for the year?

Answer 1

For each year of use, the depreciation using a straight-line approach would be $5,000. The depreciation per mile driven is $0.20. If Tom drives the vehicle 27,000 miles in the first year, he would recognize $5,400 in depreciation.

Step-by-step explanation:

(a) To calculate the depreciation using a straight-line approach, we need to subtract the value of the vehicle at the end of its useful life from its initial cost and divide it by the number of years of use. In this case, the depreciation per year would be ($28,000 - $8,000) / 4 = $5,000.

(b) To calculate the depreciation per mile driven, we need to divide the difference in value (initial cost - residual value) by the expected number of miles driven. In this case, the depreciation per mile would be ($28,000 - $8,000) / 100,000 = $0.20 per mile.

(c) If Tom drives the vehicle 27,000 miles in the first year of use, he would recognize depreciation of $0.20 per mile * 27,000 miles = $5,400 for the year.