Tony and Suzie see the need for a rugged all-terrain vehicle to transport partic
ID: 2583939 • Letter: T
Question
Tony and Suzie see the need for a rugged all-terrain vehicle to transport participants and supplies. They decide to purchase a used Suburban. The cost of the Suburban is $15,600. The vehicle is purchased in late June and will be put into use on July 1, 2019. Annual insurance from GEICO runs $2,250 per year. The paint is starting to fade, so they spend an extra $3,900 to repaint the vehicle, placing the Great Adventures logo on the front hood, back, and both sides. An additional $2,900 is spent on a deluxe roof rack and a trailer hitch. The painting, roof rack, and hitch are all expected to increase the future benefits of the vehicle for Great Adventures. They expect to use the Suburban for five years and then sell the vehicle for $5,400.
1. Determine the amount that should be recorded for the new vehicle.
2. Prepare a depreciation schedule using the straight-line method
3.Record the sale of the vehicle two years later on July 1, 2021, for $12,700.
Explanation / Answer
1) Amount Recorded in the books
Particulars
Amount
Purchase Cost
15,600
Painting the vehicle
3,900
Roof rack and trailer hitch
2,900
Annual Insurance – cannot be capitalised because it is recurring & has no future benefits because of it
0
Total amount of Capitalisation
22,400
2) Depreciation Schedule:
Capitalised Value = 22,400 , Salvage Value = 5400, Depreciable Value = 22400-5400 = 17000
Useful life of the asset = 5 Yrs.
Depreciation per year = 17000 / 5 = 3400 per year.
Particulars
Opening Book value
Amount of Depreciation to be charged
Closing Book Value
July 1, 2019 to December 31, 2019
22400
1700
20700
January 1, 2020 to December 31, 2020
20700
3400
17300
January 1, 2021 to December 31, 2021
17300
3400
13900
January 1, 2022 to December 31, 2022
13900
3400
10500
January 1, 2023 to December 31, 2023
10500
3400
7100
January 1, 2024 to June 30, 2024
7100
1700
5400
Total
17000
5400 is the salvage value on the end of 5th year.
3) Book value on July 1, 2021 = 22400 – (1700+3400+1700) = 15600
Sale value of Vehicle = 12700
Loss on sale of Vehicle = 15600 – 12700 = (2900)
Particulars
Amount
Purchase Cost
15,600
Painting the vehicle
3,900
Roof rack and trailer hitch
2,900
Annual Insurance – cannot be capitalised because it is recurring & has no future benefits because of it
0
Total amount of Capitalisation
22,400