On January 1, Year 1, the City Taxi Company purchased a new taxi cab for $63,000. The cab has an expected salvage value of $20,000. The company estimates that the cab will be driven 200,000 miles over its life. It uses the units-of-production method to determine depreciation expense. The cab was driven 45,000 miles the first year and 75,000 the second year. What is the amount of depreciation expense reported on the Year 2 income statement and the book value of the taxi at the end of Year 2, respectively?

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation rate per mile:
Depreciation rate = (cost - salvage value) / expected miles
Depreciation rate = ($63,000 - $20,000) / 200,000 miles
Depreciation rate = $0.215 per mile

Then, we can calculate the depreciation expense for each year:
Year 1 depreciation expense = 45,000 miles x $0.215/mile = $9,675
Year 2 depreciation expense = 75,000 miles x $0.215/mile = $16,125

To calculate the book value at the end of Year 2, we need to subtract the accumulated depreciation (Year 1 + Year 2) from the initial cost:
Book value = $63,000 - ($9,675 + $16,125) = $37,200

Therefore, the answer is C) $16,125 and $37,200.

On January 1, Year 1, the City Taxi Company Purchased