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Goodwin Co. owns three delivery trucks. Details for each trust at the end of the most...

Goodwin Co. owns three delivery trucks. Details for each trust at the end of the most recent year follow:

	Age	Expected Useful Life	Initial Cost	Accumulated Depreciation
Truck 1	3	6	$22,500	$11,250
Truck 2	5	6	26,250	21,875
Truck 3	2	6	28,500	9,500

At the beginning of the year, a hydraulic lift is added to Truck 1 at a cost of $4,500. The addition of the hydraulic lift will allow the company to deliver much larger objects than could previously be delivered.

At the beginning of the year, the engine of Truck 2 is overhauled at a cost of $5,000. The engine overhaul will extend the truck's useful life by three years.

Instructions

Write a short memo to Goodwin's chief financial officer explaining the financial statement effects of the expenditures associated with Trucks 1 and 2.

Solutions

Expert Solution

To, Cheif financial officer

Goodwin Co.

Effects on Financial Statements Regarding the Expenditure Incurred with Truck 1 & 2.

Truck 1 : As the Hydraulic lift is added to truck it will allow the company to deliver much larger objects than could previously be delivered,it would lead to Increasing its operational efficiency and it would lead to reduction in operational costs and savings in operational hours and the cost of Hydraulic lift will be added to Written down value of truck as follows :

Original cost = 22,500

Accumulated depreciation = 11,250

Written down value = 11,250

Remaining useful life = 3years

Cost of hydraulic lift = 4,500

WDV after cost after Hydraulic lift = 11,250+4500

= 15,750

Depreciation for Remaining 3years = 15,750/3years

Depreciation = 5,250 per annum.

Truck 2 : Engine overhaul at a cost of $5,000 will lead to increase in life of truck by further 3 years ,it will be added to WDV of truck and new amount depreciation will be calculated prospectively as follows :

Original cost of truck = 26,250

Accumulated depreciation = 21,875

Remaining useful life = 1year

WDV = 26,250 - 21,875

= 4375

Add : cost of engine overhaul = 5000

Total WDV = 9375

New life of truck after overhaul = 1year + 3 years = 4years

New depreciation = 9375/4years

= 2343.75 per annum.

ekkarill92 answered 1 year ago

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