Question

City View Limousine depreciates its stretch Hummer using the units-of-production depreciotion method and bases usage on the miles driven per year. The estimated useful life of the vehicle is 250,000 miles. The vehicle was purchased for $115,000 and is not expected to have any residual value at the end of its Iffe. It was driven a total of 40,000 miles during the first year of its useful life and 25,000 miles during the second year. What is the vehicle's net book value after these two years? If the company decides to sell the vehicle on the first day of the third year for $50,000 cash. How much GAIN or LOs5 will be recognized for this sale?

Answer 1

The vehicle's net book value after two years is $85,100. A loss of $35,100 would be recognized if the vehicle is sold for $50,000 on the first day of the third year.

Step-by-step explanation:

The vehicle's net book value after two years can be calculated using the units-of-production depreciation method.

Step 1: Calculate the depreciation per mile using the formula depreciation per mile = (Cost of vehicle - Residual value) / Estimated useful life in miles.

Step 2: Calculate the depreciation expense for each year by multiplying the depreciation per mile by the miles driven.

Step 3: Subtract the accumulated depreciation from the cost of the vehicle to get the net book value.

Using the given information, here are the calculations:

Step 1: Depreciation per mile = ($115,000 - $0) / 250,000 = $0.46 per mile.

Step 2: Depreciation expense for the first year = $0.46 * 40,000 miles = $18,400.

Depreciation expense for the second year = $0.46 * 25,000 miles = $11,500.

Step 3: Net book value after two years = $115,000 - $18,400 - $11,500 = $85,100.

The vehicle's net book value after these two years is $85,100.

If the company decides to sell the vehicle for $50,000 cash on the first day of the third year, the gain or loss recognized would be the difference between the sale price and the net book value.

Gain or loss = Sale price - Net book value = $50,000 - $85,100 = -$35,100.

A loss of $35,100 would be recognized for this sale.