On January 2, 19X1, Alamo Steel Company purchased three used delivery trucks at a total cost of \(\$ 63,000\). Before placing the trucks in service, the company spent \(\$ 2,200\) painting them, \(\$ 800\) replacing their tires, and \(\$ 4,000\) overhauling their engines and reconditioning their bodies. Alamo management estimates that the trucks will remain in service for six years and have a residual value of \(\$ 16,000\). The trucks' combined annual mileage is expected to be 18,000 miles in each of the first four years and 14,000 miles in each of the next two years. In trying to decide which depreciation method to use, Walter Glass, the general manager, requests a depreciation schedule for each of the four generally accepted depreciation methods (straight-line, units-of-production, double-declining-balance, and sum-of-years'-digits).

\section*{Required}

1. Assuming that Alamo Steel Company depreciates its delivery trucks as a unit, prepare a depreciation schedule for each of the four generally accepted depreciation methods, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. Use the formats of Exhibits 10-4 through 10-7.

2. Alamo reports to stockholders and creditors in the financial statements using the depreciation

\section*{Explaining the concept of depreciation}

(Obj. 2)

Computing depreciation by four methods and the cash-flow advantage of accelerated depreciation for tax purposes (Obj. 3, 4) method that maximizes reported income in the early years of asset use. For income tax pur-

poses, however, the company uses the depreciation method that minimizes income tax payments in those early years. Consider the first year that Alamo uses the delivery trucks. Identify the depreciation methods that meet the general manager's objectives, assuming the income tax authorities would permit the use of any of the methods.
3. Assume that cash provided by operations before income tax is \(\$ 80,000\) for the delivery trucks' first year. The combined federal and state income tax rate is 40 percent. For the two depreciation methods identified in Requirement 2, compare the net income and cash provided by operations (cash flow). Use the format of Exhibit 10-10 for your answer. Show which method gives the net-income advantage and which method gives the cash-flow advantage. Ignore the earnings rate in the cash-flow analysis.