Question

On April 1, Year 1, Marshall Company purchased a used delivery truck paying $23,000 cash and signing a Note Payable for the $14,000 for the remainder of the purchase cost. The Note Payable's interest rate was 6% and has a due date of April 1, Year 2. On the note's due date, Marshall must pay off the principal and the interest.

On April 1, Year 4, after using the truck for three years, the firm spent $4,500 on the truck. 40% of this amount was to repaint the truck to make its appearance like when purchased and the remainder was to install some navigation system to enable more efficient deliveries.

Marshall's fiscal year ends on December 31.

Q: On April 2, Year 4, what amount would appear in the PPE account as the cost basis of this truck?

Q: How much Interest Expense would appear in Marshall's income statement for the year ended December 31, Year 1?

Q: How much Interest Expense would appear in Marshall's income state for the year ended December 31, Year 2?

Answer 1

IRS estimate the delivery truck to have a useful lifespan 5 year

Delivery truck total cost = $23000+ $14000 = $37000

Under SLM depreciation it would be depreciated over the useful life of 5 years.Here the residual value is assumed to be Zero.

Over the course of three years the delivery truck will be depreciated by $ 22200 ($7400 each year).On year 4 the opening balance of delivery truck will be $14800.On April 1st year 4 the firm spent $4500 on the delivery truck of which $1800 (40% of 4500) for repainting the truck which will be charged as a expense in Income statement.The remaining $2700 was spent to install a navigation system which enable more effecient delivery.Since it improve the efficiency of the asset it will be added to the cost of the asset.So the cost of the truck in the PPE aacount on april 2 year 4 will $14800+$2700 = $17500

Q2) Notes payable = $14000

interest rate = 6%

therefore interest expense that would appear in marshall income statement for the year ended december 31st year 1 = $14000*6%*9/12 = $630

Q3) Interest expense that would appear in marshall income statement for the year ended december 31st year 2 = $14000*6%*3/12 =$210