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Natalie is also thinking of buying a van that will be used only for business. Th

ID: 2464695 • 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 (fill in chart below). Recall that Cookie Creations has a December 31 fiscal year-end.

2015

(c) 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?

Years Depreciable Cost Depreciaton Rate Annual Depreciaton Expense Accumulated Depreciation Book Value

2015

2016 2017 2018 2019 2020

Explanation / Answer

Solution:

a). Caluclation for Cost of the Van :

Estimated Purchase price of van = $38500

Add: Cost of Painting = $2500

Add: Cost of taking out back space = $1500

Total Cost ($38500+$2500+$1500) = $41000

b) Depreciation table =

Annual Depreciation

Expense

Accumulated

Depreciation

$7200

($42500-6500)/5

c) Natalie should go for straight line purpose for tax puproses also. The same method shoud be applied because if we apply a different method we get lesser amount of depreciation every year and Natalie will have to poay more tax on his income.

Year Depreciation Cost Depreciation Rate

Annual Depreciation

Expense

Accumulated

Depreciation

Book Value 2015 $36000 ($42500-$1500) 20% ($7200/$36000*100)

$7200

($42500-6500)/5

$7200 $35300 2016 $28800 ($36000-$7200) 20% $7200 $14400 $28100 2017 $21600 ($28800-$7200) 20% $7200 $21600 $20900 2018 $14400 ($21600-$7200) 20% $7200 $28800 $13700 2019 $7200 ($14400-$7200) 20% $7200 $36000 $6500 2020 - - - - $6500
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