Mei-ling is thinking of buying a van that will be used only for business. The co
ID: 2489209 • Letter: M
Question
Mei-ling is thinking of buying a van that will be used only for business. The cost of the van is estimated at NT$36,500. Mei-ling would spend an additional NT$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 NT$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 NT$2,400. Mei-ling estimates that at the end of the 5-year useful life the van will sell for NT$7,500. Assume that she will buy the van on August 15, 2018, and it will be ready for use on September 1, 2018.
Mei-ling 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
(a) Determine the cost of the van.
(b) Prepare three depreciation tables for 2018, 2019, and 2020: 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, Mei-ling estimates she will drive the van as follows: 15,000 miles in 2018; 50,000 miles in 2019; 50,000 miles in 2020; 45,000 miles in 2021; 40,000 miles in 2022. Recall that Matcha Creations has a December 31 year-end.
(c) What impact will the three methods of depreciation have on Mei-ling’s balance sheet at December 31, 2018? What impact will the three methods have on Mei-ling’s income statement in 2018?
(d) What impact will the three methods of depreciation have on Mei-ling’s income statement over the van’s total 5-year useful life?
(e) What method of depreciation would you recommend Mei-ling use?
Explanation / Answer
1)
B)
C) In balance sheet the depreciation cost will be deducted from the cost of the van to represent fair view of Van in Balance sheet as on December,31,2018. In Income Statement Depreciation cost will be treated as expenses. By Charging the depreciation as expenses the tax liability will get reduced.
D) The Impact like abaove only as Income statement Depreciation cost will get Added to the cost as expenses & Reduced the impact of tax Liabilities & Income.
E) The double decline balance method is recommended as the value of depreciation is higher from two. So that we will get advantage of Tax implications.
Cost of van= 36500+2500+1500+2400= 42900