In: Accounting
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.
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.