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Capitalized asset cost and first year depreciation, and identifying depreciation results that meet management objectives [30-40 min] On January 3, 2012, Trusty Delivery Services purchased a truck at a cost of 90,000. Before placing the truck in service, Trusty spent $3,000 painting it, $1,500 replacing tires, and $4,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $9,000. The truck’s annual mileage is expected to be 22,500 miles in each of the first four years and 10,000 miles in the fifth year- 100,000 miles total. In deciding which depreciation method to use, Mikail Johnson, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).
Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
Trusty prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. For income tax purposes, the company uses the depreciation method minimizes income taxes in the early years. Consider the first year Trusty uses the truck. Identify the depreciation methods that meet the general manager’s objectives, assuming the income tax authorities permit the use of any of the methods.


Trade in assets-two situations [10-15 min] Community Bank recently traded in office fixtures. Here are the facts:
Old fixtures:                                         New fixtures:
Cost, $96,000.                                      Cash paid: $103,000, plus the old fixtures.
Accumulated depreciation, $65,000.
Record Community Bank’s trade-in of old fixtures for new ones.
Now let’s change one fact and see a different outcome. Community Bank feels compelled to do business with Mountain Furniture, a bank customer, even though the bank can get the fixtures elsewhere at a better price. Community Bank is aware that the new fixtures’ market values is only $127,000. Now record the trade-in.

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