During the current year, Central Auto Rentals purchased 60 new automobiles at a cost of $15,000 per car. The cars will be sold to a wholesaler at an estimated $6,000 each as soon as they have been driven 45,000 miles. Central Auto Rentals computes depreciation expense on its automobiles by the units-of-output method, based on mileage.

a. Compute the amount of depreciation to be recognized for each mile that a rental automobile is driven.
b. Assuming that the 60 rental cars are driven a total of 1,610,000 miles during the current year, compute the total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year.

a. $0.20

b. $322,000

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset .

The amount of depreciation to be recognized for each mile that a rental automobile is driven

= ($15,000 - $6,000)/45,000

= $9,000/45,000

= $0.20

Total millage expected of the 60 cars before disposal

= 60 * 45,000 miles

= 2,700,000 miles

The total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year

= 1,610,000/2,700,000 * ($9,000 * 60)

= $322,000

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