On January 1, 2021, 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.

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 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 the car?

2. Under the units of production method of depreciation

a. How much depreciation will Rainbow have for each mile driven of the car?

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