Answered: removed so that she will have a lot of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Part II

Natalie is also 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 a lot 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 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, 2020, and it will be ready for use on September 1, 2020.

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.

Instructions:

Determine the cost of the van.
Prepare three depreciation tables for 2020, 2021, and 2022: one for straight-line depreciation, one for double-declining balance depreciation, and one for units-of-activity depreciation. For units-of-activity, Natalie estimates that she will drive the van as follows: 15,000 miles in 2020; 45,000 miles in 2021; and 50,000 miles in 2022. Recall that Cookie Creations has a December 31 year-end.
What impact will the three methods of depreciation have on Natalie’s balance sheet at December 31, 2020? What impact will the three methods have on Natalie’s income statement in 2020?
What impact will the three methods of depreciation have on Natalie’s income statement over the van’s total 5-year useful life?
What method of depreciation would you recommend Natalie use, and why?

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