Question

Pharoah Taxi Service uses the units-of-activity method in computing depreciation on its taxicabs. Each cab is expected to be driven 157,000 miles. Taxi 10 cost $31,800 and is expected to have a salvage value of $400. Taxi 10 was driven 37,000 miles in 2021 and 30,000 miles in 2022.
Determine depreciation cost for 2013 and 2014: $

Answer 1

The depreciation for the years 2021 and 2022 are $7,400 and $6,000 respectively

Under the units-of-activity method, the depreciation per unit of activity is computed by dividing the net cost of the asset by its estimated output in terms of activity. This method ignores the useful life of the asset.

The depreciation for 2021 and 2022 are $7,400 and $6,000 respectively, as computed below:

Depreciation rate per mile = Cost of taxi - Salvage value/Estimated miles of Each Cab

= 31800 - 400/157000

= 0.20

Depreciation for 2021 = Driven Miles in 2021×Depreciation Rate Per Mile = 37,000×$0.20=$7400

Depreciation for 2022=Driven Miles in 2022×Depreciation Rate Per Mile=30,000×$0.20=$6000

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