Question

In: Accounting

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

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, 2018, and it will be ready for use on September 1, 2018. 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) 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?

Solutions

Expert Solution

(a) cost of the van = purchase price+cost of painting+cost of shelving

= 38500+2500+1500

= $42,500

(b) Cost = $42,500. No of years = 5. Salvage value = $6,500

Thus annual depreciation as per straight line method = (42500-6500)/5 = 36000/5 = $7,200 per year.

But depreciation for first year and last year will be proportionate. For 2018 depreciation will be for 4 months only i.e. september to december.

Year Depreciable amount Rate Depreciation amount Accumulated depreciation Ending book value
2018 36,000.00 20%*4/12 2,400.00 2,400.00 40,100.00
2019 36,000.00 20% 7,200.00 9,600.00 32,900.00
2020 36,000.00 20% 7,200.00 16,800.00 25,700.00
2021 36,000.00 20% 7,200.00 24,000.00 18,500.00
2022 36,000.00 20% 7,200.00 31,200.00 11,300.00
2023 36,000.00 20%*8/12 4,800.00 36,000.00 6,500.00

(c) Natalie should use a special depreciation method for tax purposes like double declining balance method. Using an accelerated method, rather than the straight line method, will minimize income tax expenses in the early years of an asset’s life. Paying less tax will allow Natalie to use cash for other purposes.
Natalie is not required to use the same depreciation method for financial reporting and tax reporting. Like many businesses, she may choose straight-line depreciation for financial reporting and an accelerated method for tax reporting.


Related Solutions

Natalie is also thinking of buying a van that will be used only for business. The...
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...
Natalie is thinking of buying a van that will be used only for business. The cost...
Natalie is thinking of buying a van that will be used only for business. The cost of the van is estimated at $36,500. 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....
You are thinking of buying a used car for $4,000 for driving to school. Your parents...
You are thinking of buying a used car for $4,000 for driving to school. Your parents are willing to lend you the $4,000 and charge only 2.4% APR. They want the loan repaid equally in 48 monthly payments, with the first payment due at the end of the month in which you buy the car. You estimate that the monthly cost of operating the car, including gas, insurance, maintenance and licence fees will be $200 and payable at the start...
8.3 Assume that you are thinking of buying a default-free bond. Specifically, you’re thinking of buying...
8.3 Assume that you are thinking of buying a default-free bond. Specifically, you’re thinking of buying a bond issued by Risklessco, a company that is considered default-free by all major bond rating firms. You will select one of the following three bonds, which are identical except for the special features listed. Bond Face Value Maturity Coupon rate (paid annually) Yield to Maturity* Special features Price A 1000 20 years 5.5% 5% None ? B 1000 20 years 5.5% 5% Callable...
The static budget for Van Enterprises includes the production of 10,000 units. Van has also budgeted...
The static budget for Van Enterprises includes the production of 10,000 units. Van has also budgeted $50,000 for direct labor, $44,000 for direct materials, utility costs of $5,000, and the plant manager's salary of $15,000. A flexible budget for 12,000 units of production would show: Group of answer choices the same cost structure in total direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and plant manager's salary of $15,000 total variable costs of $136,800 direct labor of...
Discussion: 1. Drones are not only used in foreign combat zones. They are also being used...
Discussion: 1. Drones are not only used in foreign combat zones. They are also being used domestically by law enforcement agencies, for example, in the surveillance of criminals under a legally obtained warrant. But the possibility exists of monitoring areas in which there is no suspicion of crime but where the government wishes to obtain information. (Forest fires is a noncontroversial use, as is use on the border to monitor the movement of illegal drugs.) Drones can be equipped with...
Georgia Isaacson and her son Rubin have been thinking about buying a business. After talking to...
Georgia Isaacson and her son Rubin have been thinking about buying a business. After talking to seven entrepreneurs, all of whom have expressed an interest in selling their operations, the Isaacsons have decided to make an offer for a retail clothing store. The store is very well located, and its earnings over the past five years have been excellent. The current owner has told the Isaacsons he will sell for $500,000. The owner arrived at this value by projecting the...
These days, not only single business owner but also partnership business owners are suffering from massive...
These days, not only single business owner but also partnership business owners are suffering from massive competition as a result they are compelled to quit their business because of unlimited liability. Some experts recommend you to convert your sole proprietorship business into a corporation to avoid the threat of massive competition and unlimited liability. Now you are thinking of converting your business into corporation then underline the benefits of corporation as compared to other form of business with reference to...
3. You are thinking about starting a bee keeping business to produce honey. You also plan...
3. You are thinking about starting a bee keeping business to produce honey. You also plan to sell pollination services to almond growers in California. Below is the cost function you have estimated for producing honey and pollination services with 450 hives: C(QH, QP) = 5,000 + 12QH + 100QP + 0.002 QH QP where QH is the number of pounds of honey produced and QP is the number of acres of almond trees pollinated. (5) a. You have contracted...
After investigating the different forms of business organization, Natalie Koebel decides to operate her business as...
After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she begins the process of getting her business running. While at a trade show, Natalie is introduced to Gerry Richards, operations manager of “Biscuits,” a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits’ major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the financial statements of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT