Fast Arrow Ltd. purchased a new bus on October 3, 2018, at a total cost of $165,000. Management is contemplating the merits of using the diminishing-balance or units-of-production methods of depreciation instead of the straight-line method, which it currently uses for its other buses. The new bus has an estimated residual value of $15,000, and an estimated useful life of either four years or 300,000 km. Use of the bus will be sporadic so it could be much higher in some years than in other years. Assume the new bus is driven as follows: 7,500 km in 2018; 100,000 km in 2019; 62,500 km in 2020; 95,000 km in 2021; and 35,000 km in 2022. Fast Arrow has an October 31 year end.
Instructions
(a) Prepare separate depreciation schedules for the life of the bus using the
(1) Straight-line method,
(2) Double-diminishing-balance method, and
(3) Units-of-production method.
(b) Compare the total depreciation expense and accumulated depreciation under each of the three methods over the life of the bus.
(c) What estimates were used in determining the depreciation amounts in part (a)? How accurate do you think these estimates are?
(d) How does each method of depreciation affect the company's cash flows?
(e) Which method do you recommend? Why?