A car was purchased at Rs. 2,160,000 having useful life of 400,000 Kilometers. The car's usage was 20,000 km in the 1st year, 60,000 km in the 2nd year, 140,000 km in the 3rd year, 40,000 km in the 4th year, 100,000 km in the 5th year and 40,000 km in the 6th year.
Required:
a. Depreciation of car per kilometer.
b. Car account for first 2 years.
Answer (1)
In this question, we are going to calculate the depreciation of a car based on its usage in kilometers. Depreciation here is calculated using the units of production method, which allocates the depreciation cost of an asset based on its use, in this case, kilometers driven. This method is particularly useful for assets where the wear and tear is more related to usage than to the passage of time.
Step-by-Step Solution:
a. Depreciation of car per kilometer:
To find the depreciation cost per kilometer, we need to divide the total cost of the car by the total useful life in kilometers.
Cost of Car: Rs. 2,160,000
Useful Life in Kilometers: 400,000 km
The formula to find the depreciation per kilometer is:
Depreciation per kilometer = Useful life in kilometers Cost of Car
Substitute the given values:
Depreciation per kilometer = 400 , 000 2 , 160 , 000
Depreciation per kilometer = 5.4 Rs./km
b. Car account for first 2 years:
Now, let's calculate the depreciation for each of the first two years based on the kilometers driven.
1st Year Usage: 20,000 km
Depreciation for 1st Year = 20 , 000 × 5.4 = 108 , 000 Rs.
2nd Year Usage: 60,000 km
Depreciation for 2nd Year = 60 , 000 × 5.4 = 324 , 000 Rs.
So, the car account showing the depreciation for the first two years will reflect the following:
1st Year Depreciation: Rs. 108,000
2nd Year Depreciation: Rs. 324,000
These calculations show how the car's book value decreases each year based on its usage, helping the company reflect a more accurate expense related to the vehicle's wear and tear over time.
