Reference no: EM132379859

Question

Little Red Riding purchased a 3 tonne Isuzu truck on 1st July 2020, for $45,000, funded via a bank loan. The truck will be used to store and transport bicycles to and from each of the weekly markets. Mr and Mrs Wheeler have contacted you to find out how they need to account for depreciation.

They would like to use the cost model, but don't have any understanding of the straight-line method, units-of-production method and reducing balance method. The truck has an estimated useful life of ten years (300,000 kilometres), and the estimated residual value is $10,000.

Mr and Mrs Wheeler estimate that the truck will travel 20,000km/year in years 1 - 3, 30,000km/year in years 4 - 7, and 40,000km/year in years 8 - 10.

Required:

Memo to Mr & Mrs Wheeler, explaining what depreciation is, and how depreciation is calculated under each of the three methods. To illustrate the differences in the annual depreciation expense to Mr & Mrs Wheeler, depreciation schedule (for the entire useful life of the truck) using each of the three methods. When preparing the depreciation schedule using the reducing balance method, use 2 times the straight-line rate. Ignore any GST. Show all relevant workings.