Question

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. She expects the van to last about 5 years, and she expects to drive it for 200,000 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 $7,500. Assume that she will buy the van on August 15, 2019, and it will be ready for use on September 1, 2019.

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.

Q1. Determine the cost of the van.

Q2. Prepare three depreciation tables for 2019, 2020, and 2021: one for straight-line depreciation (similar to the one in Illustration 9-10), one for double-declining balance depreciation (Illustration 9-14), and one for units-of-activity depreciation (Illustration 9-12). For units-of-activity, Natalie estimates she will drive the van as follows: 15,000 miles in 2019; 45,000 miles in 2020; 50,000 miles in 2021; 45,000 miles in 2022; 40,000 miles in 2023. Recall that Cookie Creations has a December 31 year-end

Q3. What impact will the three methods of depreciation have on Natalie’s balance sheet at December 31, 2019? What impact will the three methods have on Natalie’s income statement in 2019?

	Straight-Line	Double-Declining	Units of Activity
Cost of asset
Accumulated Depression
Net book Value
Depreciation Expense

Match the following with Straight Line, Double Declining, or Units of Activity

Lowest amount of Net income

Lowest amount of stockholders' equity

lowest net book value

greatest amount of net income

greatest amount of stockholders equity

greatest book value

Answer 1

1	Total Cost of VAN
	Estimated Cost of Van	$                      36,500.00
	Add: Painting Cost	$                        2,500.00
	Add: other Cost	$                        1,500.00
	Total Cost of VAN	$                      40,500.00

STRAIGHT - LINE DEPRECIATION
Years	Depreciable Cost	Annual depreciation Expense	Accumulated Depreciation	bookValue
				40500
2019	33000	2,200	2,200	38,300
2020	33000	6,600	8,800	31,700
2021	33000	6,600	15,400	25,100

Double-Declining Depreciation Rate: 1/5*2= 40%

Year	NBV (Beg. of Year)	Depreciation Expense	Accumulated Depreciation	Net Bk Value
				40500
2019	40500	5400	5400	35100
2020	35100	14040	19440	21060
2021	21060	8424	27864	12636

Units of Activity

Year	Units of Activity	Depreciation Expense	Accumulated Depreciation	Net Bk Value
				40500
2019	15000	2475	2475	38025
2020	45000	7425	9900	30600
2021	50000	8250	18150	22350

impact will the three methods of depreciation

	straight line	double declining	units of activity
cost of asset	40500	40500	40500
accumulated depreciation	2200	5400	2475
net book value	38300	35100	38025
depreciation expense	2200	5400	2475

Match the following with Straight Line, Double Declining, or Units of Activity

Lowest amount of Net income= Double Declining

Lowest amount of stockholders' equity = Double Declining

lowest net book value = Double Declining

greatest amount of net income = Straight Line

greatest amount of stockholders equity = Straight Line

greatest book value = Straight Line