E8-5 Determining Financial Statement Effects of an Asset Acquisition and Depreci

Question

E8-5 Determining Financial Statement Effects of an Asset Acquisition and Depreciation (Straight-Line Depreciation) LO8-2, 8-3 [The following information applies to the questions displayed below. Steve's Outdoor Company purchased a new delivery van on January 1 for $45,000 plus $3,800 in sales tax. The company paid $12,800 cash on the van (including the sales tax), with the $36,000 balance on credit at 8 percent interest due in nine months (on September 30). On January 2, the company paid cash of $700 to have the company name and logo painted on the van. On September 30, the company paid the balance due orn the van plus the interest. On December 31 (the end of the accounting period), Steve's Outdoor recorded depreciation on the van using the straight-line method with an estimated useful life of 5 years and an estimated residual value of $4,500. References Section Break E8-5 Determining Financial Statement Effects of an Asset Acquisition and Depreclation (Straight-Line Depreciation) LO8-2, 8-3

Explanation / Answer

Equipment (Van)

$49500

Less: Accumulated depreciation

($18000)

Net book value at the end of year 2

$31500

Working note & Explanation;

First of all let’s calculate acquisition cost of delivery van;

Basic cost

$45000

Add: Sale tax

$3800

Add: Logo cost

$700

Total acquisition cost of delivery van

$49500

Now let’s calculate depreciation for 2 years;

Acquisition cost of delivery van = $49500

Estimated residual value = $4500

Estimated useful life = 5 years

Thus annual depreciation will be ($49500 – $4500) / 5 = $9000

Accumulated depreciation for 2 years ($9000 * 2) = $18000

Equipment (Van)

$49500

Less: Accumulated depreciation

($18000)

Net book value at the end of year 2

$31500

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