Question
Fresh Food Express specializes in the delivery of refrigerated foods. The manager of the Delivery Division purchased a delivery truck for $240,000 and has expressed
Fresh Food Express specializes in the delivery of refrigerated foods. The manager of the Delivery Division purchased a delivery truck for $240,000 and has expressed concern over the effect of depreciating that and other trucks on his Divisions profits. As an assistant to the Chief Financial Officer (CFO), you have been asked to prepare a presentation meant to demonstrate the differential effects of three depreciation methods: activity-based, straight-line, and double-declining-balance. The trucks estimated residual value is $40,000. You have plotted depreciation each year (left graph) using an estimated five-year useful life. The graph on the right shows the accumulation of depreciation each for each method.
Which depreciation method results in the most depreciation and thus the largest reduction in Divisions profits in the first year of the trucks five-year useful life?
Which depreciation method results in the same amount of depreciation each year?
Which depreciation method results in the most accumulated depreciation by the end of the trucks five-year useful life?
What is the trucks estimated residual value?
By the end of Year 2, Accumulated Depreciation under Method 1 is $80,000. What would be the reported book value of the truck at that time?
If the CFO instead uses Method 3, Accumulated Depreciation by the end of Year 2 would be $153,600. What would be the reported book value of the truck at the end of Year 2 using Method 3?
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