Natalie is also thinking of buying a van that will be used only for business. Th
ID: 2464635 • Letter: N
Question
Natalie is also thinking of buying a van that will be used only for business. The cost of the van is estimated at $38,500. Natalie would spend an additional $2,500 to have the van painted. In addition, she wants the back seat of the van removed so that she will have lots of room to transport her mixer inventory as well as her baking supplies. The cost of taking out the back seat and installing shelving units is estimated at $1,500. She expects the van to last her about 5 years, and she expects to drive it for 100,000 miles. The annual cost of vehicle insurance will be $2,400. Natalie estimates that at the end of the 5-year useful life the van will sell for $6,500. Assume that she will buy the van on August 15, 2015, and it will be ready for use on September 1, 2015.
Natalie is concerned about the impact of the van’s cost on her income statement and balance sheet. She has come to you for advice on calculating the van’s depreciation.
Instructions
(a) Determine the cost of the van.
(b) Prepare a depreciation table for straight-line depreciation (similar to the one in Illustration 9-9). Recall that Cookie Creations has a December 31 fiscal year-end.
(c) Bonus: What method should Natalie use for tax purposes? Provide a justification for your choice. Is she required to use the same approach for financial reporting and tax reporting?
Explanation / Answer
(a)
Calculation of cost of the van:
Purchase Price
$ 38,500
Add: Painting Expenses
$ 2,500
Add: Cost of installing shelving units
$ 1,500
Cost of the van =
$ 42,500
(b)
Depreciation table for straight-line depreciation
Workings:
Annual Depreciation = (Cost - Salvage Value) / Life years
Annual Depreciation = (42500-6500) / 5 = $7500
Year ending
Depreciation
Dec. 31, 2015
For 4 Months (Sept 1 2015 to Dec. 31, 2015) =7500 * 4 /12 =
$ 2,500
Dec. 31, 2016
For full year
$ 2,500
Dec. 31, 2017
For full year
$ 2,500
Dec. 31, 2018
For full year
$ 2,500
Dec. 31, 2019
For full year
$ 2,500
Dec. 31, 2020
For 8 Months (Jan 1 2020 to Aug. 31, 2015) =7500 * 8 /12 =
$ 5,000
(a)
Calculation of cost of the van:
Purchase Price
$ 38,500
Add: Painting Expenses
$ 2,500
Add: Cost of installing shelving units
$ 1,500
Cost of the van =
$ 42,500
(b)
Depreciation table for straight-line depreciation
Workings:
Annual Depreciation = (Cost - Salvage Value) / Life years
Annual Depreciation = (42500-6500) / 5 = $7500
Year ending
Depreciation
Dec. 31, 2015
For 4 Months (Sept 1 2015 to Dec. 31, 2015) =7500 * 4 /12 =
$ 2,500
Dec. 31, 2016
For full year
$ 2,500
Dec. 31, 2017
For full year
$ 2,500
Dec. 31, 2018
For full year
$ 2,500
Dec. 31, 2019
For full year
$ 2,500
Dec. 31, 2020
For 8 Months (Jan 1 2020 to Aug. 31, 2015) =7500 * 8 /12 =
$ 5,000
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