2. Tasty Catering purchased a van on January 1, 201s, for $48,000. The company d

Question

2. Tasty Catering purchased a van on January 1, 201s, for $48,000. The company decided to depreciate the van over five-year period using the straight-line method. The company estimated its residual value at $3,000. Show how the costs should be presented on Tasty's balance sheet and income statement for the full year ended June 30, 2017. Label the statements properly. 3. Assume that Banker Company purchased a new machine on January 1,2017, for $96,000. The machine has an estimated useful life of nine years and a residual value of $6,000, Banker has chosen to use the straight-line methodo depreciation. On January 1, 2019, Banker discovered that the machine would not be useful beyond December 31, and estimated its value at that time to be $4,000, 2022,

Explanation / Answer

2.) Depreciation for each year = (Cost-Residual Value)/useful life  

= ($48,000-$3,000)/5 years = $9,000 per year

As the company close its year on June 30 of every year thus the depreciation will be:-

For year ended June 30,2015 (for 6 months) = $4,500 ($9,000*6/12)

For year ended June 30,2016 and June 30,2017 = $9,000

Thus the cost of van purchased as on each year will be:-

As on June 30,2015 = $43,500 ($48,000-$4,500)

As on June 30,2016 = $34,500 ($43,500-$9,000)

As on June 30,2017 = $25,500 ($34,500-$9,000)

Income Statement for the year ended june 30,2017 (Amount in $)

Balance Sheet as on june 30,2017 (Amount in $)

3.) Depreciation of machine = ($96,000-$6,000)/9 years = $10,000 per year

On January 1,2019 the book value of machine will be:-

As on jan 1,2019, the Banker discovered that the remaining useful life of machine is 4 years (i.e. upto Dec 31,2022). As it is a change in estimate. the company does not need to adjust its prior periods. It will report the change in the depreciation rate in the subsequent periods. To calculate the new depreciation rate the company will divide the remaining book value of machine less the salvage value by the remaining estimated life(i.e. 4 years)

New Depreciation expense = ($66,000-$4,000)/4 years = $15,500 (for year 2019 to 2022)

Revenue Total (A) Costs Depreciation 9,000

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