On January 1, Titan Trucking purchased a used Kenworth truck at a cost of $48,000. Titan Trucking expects the truck to remain useful for four years (800,000 miles) and to have a residual value of $8,000. Titan Trucking expects the truck to be driven 160,000 miles the first year and 280,000 miles the second year. Requirements 1. Compute Titan Trucking’s first-year depreciation expense on the truck using the following methods: a. Straight-line b. Units of production c. Double-declining balance

A. $10,000

B. $8,000

C. $24,000

Explanation:

We are to calculate the depreciation using three methods.

A. Straight-line method:

First we calculate the depreciable amount = $48,000 - $8,000

= $40,000

Depreciation expense for the first year ended Dec 31:

= $40,000/useful life

= $40,000/4

= $10,000.

Therefore, first year depreciation expense is $10,000 and there will be a yearly depreciation of $10,000 as the depreciation amount is expected to be the same.

B. Units of production method:

First, we calculate the units of production rate thus:

(Cost - salvage value)/estimated units to be produced over useful life

= ($48,000 - $8,000)/800,000

= 40,000/800,000

= 0.05

Units of production is 0.05.

Now we multiply 0.05 by the actual miles driven in first year to get the first year depreciation expense.

160,000 x 0.05 = $8,000

Therefore, first year depreciation expense is $8,000.

C. Double-declining balance method:

For this method, we first divide 100% by the useful life, thus

100%/4 = 25%

Now we multiply this percentage by 2

25% x 2 = 50%

Therefore, double-declining depreciation rate is 50%.

50% of the cost will give us the depreciation per year.

50% x $48,000

= $24,000

1) sales revenue  61,995.26

2) lease receivables 61,995.26 debit

        sales revenue  61,995.26 credit

 cost of good sold 56,000 debit

  truck inventory      56,000 credit

truck   61,995.26 debit

lease payable  61,995.26 credit

3)

For the lessor will be interest revenue while interest expense for the lessee

4)

cash 7,000 debit

  interest revenue 1,649.86 credit

 lease receivables 5,510.65 credit

--entry for the lessor--

lease payable      5,510.65 debit

interest expense 1,649.86 debit

        cash                    7,000 credit

--entry for the lessee--

5)

cash 21,000 debit

  interest revenue 611.65 credit

 lease receivables 20,388.35 credit

--entry for the lessor--

lease payable      20,388.35 debit

interest expense        611.65 debit

        cash                        21,000 credit

--entry for the lessee--

Explanation:

1) the sales revenue will be the present value of all the lease payments and the residual value of the asset or the bargain-option

Present Value of Annuity-due

C7,000

time8

rate0.03

PV$50,611.9807

PRESENT VALUE OF LUMP SUM

Maturity  14,000.00

time   7.00

rate  0.03

PV   11,383.28

PV of the lease: 50,611.98 + 11,051.73 = 61,995.26

2) the lessor will have a lease receivable while the lessee has a lease payable.