Question

Depreciation

Assume that you recently applied for a student loan to go to graduate school. As part of the application process, your bank requested a list of your assets. Aside from an extensive CD collection, your only other asset is a pickup truck. You purchased the truck six years ago for $15,000. Its current fair value is approximately $5,000.

a. What factors caused your pickup truck to decline $10,000 in value?

b. Assume that the bank is willing to lend you money for graduate school. Even with the loan, however, you still need to raise an additional $5,000. Do you think that the bank will lend you $5,000 more for graduate school if you agree to use your truck as collateral? Explain.

c. Assume that the truck has been used solely in a delivery service business that you operate while in college. Would your balance sheet necessarily show $10,000 in accumulated depreciation related to the truck? Explain.

Answer 1

Answer:a

The factors are which caused depreciation of that car $10000, are below.

1. Change of the condition of asset is declined over time
2. Maintenance cost through out the year
3. Mileage capacity may be fluctuated due to irregular riding.
4. Number of kilometers it is travelled
5. EMI cost per year according to the bank policy

So, if purchase cost $15000, and current fair cost is $5000, then the condition of the car and the number of kms has the direct impact on value.

Answer:b

Yes, if bank will see that the truck is going on parallel, then bank will agree to lend that remaining amount of money due to there is high chance to get back the money as per EMI to the bank very fast, that controls & decline to the extra pressure of bank budget as well as the borrower with in a particular time bound.

Answer: c

   Yes, the balance sheet definitely show $10000 as the accumulated depreciation of the truck, as this shows the equity plus liability of the service also keeping the revaluation after a time frames with the lender bank.