Tony and Suzie see the need for a rugged all-terrain vehicle to transport partic
ID: 2443067 • Letter: T
Question
Tony and Suzie see the need for a rugged all-terrain vehicle to transport participants and supplies. They would love to buy a Hummer, but it is just too expensive and too small for their needs, so they settle on a used Suburban. The cost of the Suburban is $12,800. The vehicle is purchased in late June and will be put into use on July 1, 2011. Annual insurance from GEICO runs $1,000 per year. The paint is starting to fade, so they spend an extra $3,600 to repaint the vehicle placing the Great Adventures logo on the front hood, back, and both sides. An additional $3,100 is spent on a deluxe roof rack and a trailer hitch. They expect to use the Suburban for five years and then sell the vehicle for $3,700.Determine the amount that should be recorded for the new vehicle...
Explanation / Answer
The trick here is determining what should be contained in the cost of the asset, and what is a normal expense of operating the asset. The initial cost of the asset should, obviously, be contained in the asset. +12,800 The insurance is an expense of operating the asset, and should not be included. The addition of new equipment to the asset is a capital expense and should be included. +3100. The resale value of the asset and life of the asset are both used to find depreciation and do not need to be used. Book Value = 12,800 + 3,100 = $15,900