On January 1, 2014, Gray Company purchased a new company car for $36,000. The car has an expected salvage value of $6,000. The company estimates that the car will be driven 100,000 miles over its life and uses units of production to determine depreciation expense. The car was driven 20,000 miles in 2014. At the beginning of 2015 the company revised the estimated total life to 120,000 miles. If 26,000 miles were driven in 2015, the amount of depreciation expense for the year would be

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation rate per mile:

Cost - Salvage value = Depreciation base 
$36,000 - $6,000 = $30,000

Depreciation base / Total miles = Depreciation rate per mile 
$30,000 / 100,000 = $0.30 per mile

Using this rate, we can calculate the depreciation expense for each year based on the miles driven:

2014 depreciation = $0.30 per mile x 20,000 miles = $6,000 
2015 depreciation = $0.30 per mile x 26,000 miles = $7,800

However, since the estimated life was revised at the beginning of 2015, we need to recalculate the total miles remaining:

Total miles - Miles driven in 2014 = Miles remaining 
100,000 - 20,000 = 80,000

New total miles - Miles remaining = Miles driven in 2015 
120,000 - 80,000 = 40,000

Using the new mileage, we can calculate the 2015 depreciation expense:

$0.30 per mile x 26,000 miles = $7,800 
$0.30 per mile x 14,000 miles = $4,200

Total 2015 depreciation = $7,800 - $4,200 = $3,600

Therefore, the total depreciation expense for 2015 would be $6,000 + $3,600 = $9,600. However, since we are only asked for the amount of depreciation expense for the year, the answer is C) $6,240.

On January 1, 2014, Gray Company Purchased a New Company