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 on July 1, 2022, for $12,000. They expect to use the Suburban for five years and then sell the vehicle for $4,500. The following expenditures related to the vehicle were also made on July 1, 2022: The company pays $1,800 to GEICO for a one-year insurance policy. The company spends an extra $3,000 to repaint the vehicle, placing the Great Adventures logo on the front hood, back, and both sides. An additional $2,000 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 $4,500.
Required:

a. Determine the amount that should be recorded for the new vehicle.
b. Prepare a depreciation schedule using the straight-line method.

Answer 1

Answer:

a. $17,000

b.  

Period                     Cost          Accu. depreciation    Depreciation      NBV

1 Jul - 31 Dec '22    $17000               -                          ($1,250)           $15,750

1 Jan. - 1 Dec '23    $17000          ($1,250)                   ($2,500)          $13,250

1 Jan. - 1 Dec '24    $17000          ($3,750)                   ($2,500)          $10,750

1 Jan. - 1 Dec '25    $17000          ($6,250)                   ($2,500)          $8,250

1 Jan. - 1 Dec '26    $17000          ($8,750)                    ($2,500)          $5,750

1 Jan. - 30 Jun'23    $17000        ($11,250)                    ($1,250)          $4,500

Explanation:

The accounting standard for property plant and equipment under IFRS is IAS 16 property plant and equipment (PPE) requires that items of PPE be recognized at cost.

The historical cost principle also applies. These cost include all cost that are necessary to make the asset available for use including those that improves the useful life of such asset.

Hence the cost of the new vehicle

= $12,000 + $3,000 + $2,000

= $17,000

Depreciation is the systematic allocation of cost over the useful life of an asset. it is given as

Depreciation = (cost less residual value)/estimated useful life

Depreciation = ($17,000 - $4,500)/5

= $2,500

Answer 2

Answer:

a. The cost of the vehicle to be recorded as an asset is:

Purchase price                    $12,000

Repainting Cost                   $3,000

Deluxe Roof Rack                $2,000

Total Cost of Vehicle           $17,000

b. Depreciation Schedule Using Straight Line Method:

Formula: Annual Depreciation:  Cost - Residual Value/ Expected Useful Life

The Annual Depreciation is: 17,000-4,500/ 5 years

= 2,500 per year

Year    Cost    Annual Depreciation   Accumulated Depreciation  NBV

1        17,000          2,500                          2,500                                  14,500

2       17,000          2,500                          5,000                                  12,000

3       17,000          2,500                          7,500                                    9,500

4       17,000          2,500                          10,000                                   7,000

5       17,000          2,500                          12,500                                   4,500

* Net Book value (NBV) = cost-accumulated depreciation.

e.g For year 1 (17,000-2,500) = 14,500

Explanation:

a. Capital expenditure are all the expenses that results in purchase of a new asset or expenses incurred that results in increase of assets life or earning capacity of the asset .

Tony and Suzie should recognize the purchase price, repainting cost and cost of deluxe roof rack and a trailer hitch as the vehicle cost as they are all increasing the earning capacity of the vehicle.

The GEICO insurance is not included as it is a revenue expense which needs to be charged as an expense in income statement.