On January 1, 2020, Rainbow Company paid cash to purchase an automobile. The car dealer gave Rainbow a $3,000 cash discount off the $31,000 list price. However, Rainbow paid an additional $5,000 to equip the car with a more luxurious interior and high-tech lighting so it would have greater appeal. Rainbow Company expected the car to have a five-year useful life and a $5,000 salvage value. Rainbow also expected to use the car for 140,000 miles before disposing of it. Rainbow used the car, and it was driven 20,000 / 30,000 / 40,000 / 30,000 / 20,000 miles during each use year respectively. Rainbow sold the car on January 1, 2027, for $6,000 cash.

1. What is the cost of the car that Rainbow Company will record?

2. Under the straight-line method of depreciation, how much depreciation expense will Rainbow have each year of the cars use?

3. Under the double declining balance method of depreciation a. What is the percentage depreciation Rainbow will use?

b. At the end of the first year, how much depreciation expense will Rainbow have for the car?

c. At the end of the first year, what will be the book value of the car?

d. At the end of the second year, how much depreciation expense will Rainbow have for the car?

e. At the end of the second year, what will be the book value of the car?

4. Under the units of production method of depreciation a. How much depreciation will Rainbow have for each mile driven by the car?

b. How much depreciation expense will Rainbow have in the last three years under this method?

5. When Rainbow sold the car, what did it recognize as a gain or loss, and for how much?