On January 1,2016,the City Taxi Company purchased a new taxi cab for $36,000.The cab has an expected salvage value of $2,000.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 48,000 the second year.What would be the depreciation expense reported on the 2017 income statement and the book value of the taxi at the end of 2017?

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation rate per unit of production.

Depreciable cost = cost of taxi - salvage value 
Depreciable cost = $36,000 - $2,000 = $34,000

Depreciation rate = depreciable cost / total estimated miles 
Depreciation rate = $34,000 / 200,000 miles = $0.17 per mile

Depreciation expense for 2017 can now be calculated:

Depreciation expense = depreciation rate x miles driven in 2017 
Depreciation expense = $0.17 x 48,000 = $8,160

To calculate the book value of the taxi at the end of 2017, we need to subtract the total depreciation expense from the cost of the taxi:

Book value = cost of taxi - total depreciation expense 
Book value = $36,000 - ($8,640 + $8,160) = $19,200

Therefore, the answer is C ($8,160/$20,190).

On January 1,2016,the City Taxi Company Purchased a New Taxi