Kristen Lu purchased a used automobile for $26,800 at the beginning of last year and incurred the following operating costs: Depreciation ($26,800 ÷ 5 years) $ 5,360 Insurance $ 2,800 Garage rent $ 1,500 Automobile tax and license $ 740 Variable operating cost $ 0.13 per mile
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Kristen Lu purchased a used automobile for $26,800 at the beginning of last year and incurred the following operating costs:
| $ | 5,360 | ||
| Insurance | $ | 2,800 | |
| Garage rent | $ | 1,500 | |
| Automobile tax and license | $ | 740 | |
| Variable operating cost | $ | 0.13 | per mile |
The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that, at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line depreciation is $5,360. The car is kept in a garage for a monthly fee.
Required:
1. Kristen drove the car 26,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.)
2. Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision? Assume that there is no decrease in the resale value of the car due to its use. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
check all that apply
- Variable operating costsunanswered
- Depreciationunanswered
- Automobile taxunanswered
- License costsunanswered
- Insurance costsunanswered
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