Question

In: Accounting

On December 31, year 0, your company bought a delivery truck for $45,000. The expected useful...

On December 31, year 0, your company bought a delivery truck for $45,000. The expected useful life is 4 years, with an expected salvage value of $15,000. On January 1, year 3, your company sold the asset. Provide the financial statement effects of the sale under the different sale prices below.

Sale price	PP&E, Gross	Accumulated Depreciation	NI (pretax)	CFO (ignore taxes)	CFI
$29,850
$30,000
$30,670

True or false: If the salvage value is revised upwards, firms must restate prior periods’ financial statements to update book values and depreciation amounts
True or false: If a firm, by assumption, changes the useful life of an asset, depreciation in the future will be different from what it would have been absent the change in assumption.

Expert Solution

Annual depreciation = (Cost price - Salvage value)/Useful life

= (45,000 - 15,000)/4

= $7,500

Hence, accumulated depreciation after 2 years = 7,500x 2

= $15,000

P,P&E, net after 2 years = Cost price - Accumulated depreciation

= 45,000 - 15,000

= $30,000

Sale price	PP&E, Gross	Accumulated depreciation	NI(pretax)	CFO	CFI
$29,850	45,000	15,000	- $150	$150	29,850
$30,000	45,000	15,000	0	0	30,000
$30,670	45,000	15,000	$670	- $670	30,670

2.

If the salvage value is revised upwards, firms must restate prior periods’ financial statements to update book values and depreciation amounts.

This statement is false. Once financial statements are prepared, no further changes can be made in it. Hence, prior periods’ financial statements are not updated, only adjustment entries can be made in the subsequent year.

If a firm, by assumption, changes the useful life of an asset, depreciation in the future will be different from what it would have been absent the change in assumption.

This statement is true. If useful life is increased, annual depreciation would decrease and if the useful life is decreased, annual depreciation would increase. Hence, depreciation to be charged in the future would be different from the original depreciation.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.

ekkarill92 answered 1 year ago

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