Question

City Taxi Service purchased a new auto to use as a taxi on January 1, 2016, for $36,000. In addition, City paid sales tax and title fees of $1,200 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $4,000.

a. Using the straight-line method, compute the depreciation expense for 2016 and 2017.

Answer 1

The depreciation expense for City Taxi Service's new auto for the years 2016 and 2017, calculated using the straight-line method, is $6,640 for each year.

Step-by-step explanation:

To calculate the depreciation expense for 2016 and 2017 using the straight-line method, first we have to determine the depreciable base of the taxi. The purchase price of the taxi was $36,000 and the additional costs for sales tax and title fees were $1,200, making the total cost $37,200. This total cost will be reduced by the salvage value of the taxi, which is $4,000, to get the depreciable base.

The formula for the straight-line depreciation method is:

Annual Depreciation Expense = (Cost - Salvage Value) / Useful Life

Plugging in the numbers:

Annual Depreciation Expense = ($37,200 - $4,000) / 5 years

Annual Depreciation Expense = $33,200 / 5 years

Annual Depreciation Expense = $6,640

Therefore, the depreciation expense for both 2016 and 2017 is $6,640 each year.