Diego Corporation purchased a new truck for $515,000 at the beginning of year 1. The truck has an estimated residual value of $50,000 and an estimated useful life of five years. The truck is expected to last 18,000 hours. It was used 3,600 hours in year 1, 4,000 in year 2, 5,000 in year 3, 3,000 in year 4, and 2,400 in year 5.
1. Compute the annual depreciation and carrying value for the new truck for each of the five years (round to the nearest dollar where necessary) under each of the following methods:
2. If the truck is sold for $300,000 after year 3, what would be the amount of gain or loss under each method?
3. Do the three methods differ in their effect on the company’s profitability? Do they differ in their effect on the company’s operating cash flows? Explain.