Question

Sunland Taxi Service uses the units-of-activity method in computing depreciation on its taxicabs. Each cab is expected to be driven 148,000 miles. Taxi no. 10 cost $38,000 and is expected to have a salvage value of $1,000. Taxi no. 10 is driven 28,500 miles in year 1 and 21,500 miles in year 2.

a. Calculate depreciation cost per mile using unit-of-activity method. (Round answer to 2 decimal places, e.g. 0.50.)

Depreciation cost: $______ per mile

b. Compute the depreciation for each year. (Round answers to 0 decimal places, e.g. 125.)

Depreciation:

Year 1: $ ________

Year 2: $_________

Answer 1

a. $0.25

b. Year 1 = $7,125 Year 2 = $5,375

Step-by-step explanation:

Depreciation Charge using units of activity method :

Depreciation Charge = (Cost - Salvage Value) × (period`s activity/total expected activity)

Depreciation cost per mile = (Cost - Salvage Value) / total expected activity

= ($38,000-$1,000) /148,000

= $0.25

YEAR 1

Depreciation = ($38,000-$1,000) × (28,500/148,000)

= $7,125

YEAR 2

Depreciation = ($38,000-$1,000) × (21,500/148,000)

= $5,375