Grimwood Trucking purchased a tractor trailer for $147,000. Grimwood uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record?

$11,340

Explanation:

The unit of the activity depreciation method determines the depreciation amount based on the level of usage. The method calculates the depreciation amount per unit of activity.

For Grimwood trucking, depreciation per unit.

Depreciation per unit = Cost of the asset/ expected usage

Depreciable amount = asset cost - salvage value

=$147,000 -$21,000 = $126,000

Depreciation per unit = Depreciable amount/ expected usage

=$126,000/ 1,000,000

=$0.126 per mile.

If the truck is driven for 90,000 in the first year

Amount of depreciation = $0.126 x 90,000

=$11,340

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