PROBLEM:2

On October 1, 2017 Welch Auto Rentals purchases a new automobile for $30,000 to add to its fleet of rental cars. The automobiles are rented out on a short-term basis with rental fees calculated based on distance driven by the customer. Welchs policy is to sell and replace a car after the earlier of 3 years, or 75,000 kilometres. The average selling price of the used cars is $8,000. This particular car was driven 8,000 km in 2017, 39,000 km in 2018 and 21,000 km in 2019.

Instructions

a) Calculate 2017 and 2018 depreciation expense under each of the following methods:

(i) Straight-line

(ii) Diminishing-balance using a 40% rate

(iii) Units-of-production

b) Which method will best match the estimated pattern in which the assets economic benefits are expected to be consumed? Explain.