Continuing Cookie Chronicle 1 Continuing Cookie Chronicle (Note: This is a conti

Question

Continuing Cookie Chronicle 1

Continuing Cookie Chronicle

(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 8.)

CCC9

Natalie is also thinking of buying a van that will be used only for business. The cost of the van is estimated at $38,500. 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 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 $1,500. She expects the van to last her about 5 years, and she expects to drive it for 100,000 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 $6,500. Assume that she will buy the van on August 15, 2015, and it will be ready for use on September 1, 2015.

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

(a) Determine the cost of the van.

(b) Prepare a depreciation table for straight-line depreciation (similar to the one in Illustration 9-9). Recall that Cookie Creations has a December 31 fiscal year-end.

(c) Bonus: What method should Natalie use for tax purposes? Provide a justification for your choice. Is she required to use the same approach for financial reporting and tax reporting?

Explanation / Answer

a) Cost of the van Cost of the van 38500 Painting cost 2500 removing back seat 1500 Cost of the van capitalised 42500 b) Cost of the van capitalised 42500 Salvage value 6500 useful life ( in years) 5 Straight line depriciation = ( Value capitalised - salvage value ) / useful life                                                     = ( 42500 - 6500 ) / 5                                                      '= 7200 pa Depriciation table Year Value Depriciation WDV A B C = A-B 1st september to 31st December 2015 7200/12*4 ( 4 month) 42500 2400 40100 1st January- 31st Dec 2016 40100 7200 32900 1st January- 31st Dec 2017 32900 7200 25700 1st January- 31st Dec 2018 25700 7200 18500 1st January- 31st Dec 2019 18500 7200 11300 1st January- 31st Aug 2020 11300 4800 6500 c) The method to use for tax purposes is MACRS This is modified Accelerated Cost recovery system for depriciation , This method allows larger deduction in earlier years and lower in later years. This method Is better as it will allow larger depriciation benefit in the earlier years leading to lower tax outflow in the earlier year than later years She is not required to use the same method for financial reporting ,

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