Archie Stanton starts a trucking business on January 1st, 2020. He decides to rent his premises...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Archie Stanton starts a trucking business on January 1st, 2020. He decides to rent his premises in which to conduct his business and house his trucks. On January 1st he purchases 5 trucks each costing $255,000. Archie believes that the trucks have a useful life of 4 years. He also intends to offer delivery services over very long distances with heavily loaded trucks such that at the end of the 4 years they will each have a residual value of only $6,528. Archie has asked you to advise him on which depreciation method he should adopt for the preparation of his financial statements. He wants to consider the use of either straight-line depreciation or reducing balance depreciation since keeping track of the number of kilometres travelled by each truck will be too onerous for the use of the units of production method. You determine that the correct depreciation rate for the use of the reducing balance method is 60%. Archie has also decided to produce his financial statements on December 31st each year. You come back to Archie with the following tables that show how the Depreciation expense each year and the Carrying Value of the Trucks will vary based on the depreciation method chosen. Cost Price of the trucks Residual value of the trucks. Depreciable Amount of the trucks Delivery Truck Details Straight-line depreciation each year for 4 years Reducing Balance depreciation rate. Cost of Trucks. Accumulated Depreciation Carrying Value... Annual Depreciation Expense Cost of Trucks Accumulated Depreciation Carrying Value. Annual Depreciation Expense 1st Jan 2020 $1,275,000 0 $1,275,000 5 trucks @ $255,000 each 5 trucks @ $6,528 each Straight-Line Depreciation Allocation of the $1,242,360 Depreciable Amount 31st Dec 2020 31st Dec 2021 31st Dec 2022 $1,275,000 $1,275,000 $1,275,000 $310,590 $621,180 $931,770 $964,410 $653,820 $343,230 $310,590 $310,590 $310,590 1st Jan 2020 $1,275,000 $1,275,000 $1,242,360/4 = 60% $1,275,000 $32,640 $1,242,360 $310,590 31st Dec 2020 $1,275,000 $765,000 $510,000 $765.000 Reducing Balance Depreciation Allocation of the $1,242,360 Depreciable Amount 31st Dec 2021 31st Dec 2022 $1,275,000 $1,275,000 $1,071,000 $1,193,400 $204,000 $81,600 $306,000 $122,400 31st Dec 2023 $1,275,000 $1,242,360 $32,640 $310,590 31st Dec 2023 $1,275,000 $1,242,360 $32,640 $48,960 You advise Archie to adopt the straight-line method since you do expect that the trucks will deliver consistent and reliable service for the 4 years provided that they are regularly serviced and maintained. In your opinion, the reducing-balance method does not adequately reveal the usage of their service potential across the 4 years. Archie agrees with you and adopts the straight-line method for financial reporting purposes. Archie is now looking at his financial statements for the year ended December 31st, 2020 which have been prepared using straight-line depreciation. He has managed to produce an operating profit of $200,000 for the 2020 year. His balance sheet on December 31st, 2020 reveals Net Current Assets of $35,590 and his only Non-current Assets are the trucks described above. He turns to you and says "Wouldn't my Return on Capital Employed (ROCE) have been considerably higher if I had used reducing balance depreciation? After all, the carrying value of my Non-current Assets would have been significantly smaller ($510,000 for reducing balance versus $964,410 for straight-line) meaning that I would have made this operating profit using a smaller quantity of capital, so the ROCE would have been higher?" Required: Is Archie correct? Explain using the depreciation schedules shown above and the information provided from the December 31st financial statements. Would his ROCE be "considerably higher" using the reducing balance method compared with use of the straight-line method which is the one you advised him to adopt? In your answer compute the ROCE under both methods. [Maximum 300 words] (10 marks) Archie Stanton starts a trucking business on January 1st, 2020. He decides to rent his premises in which to conduct his business and house his trucks. On January 1st he purchases 5 trucks each costing $255,000. Archie believes that the trucks have a useful life of 4 years. He also intends to offer delivery services over very long distances with heavily loaded trucks such that at the end of the 4 years they will each have a residual value of only $6,528. Archie has asked you to advise him on which depreciation method he should adopt for the preparation of his financial statements. He wants to consider the use of either straight-line depreciation or reducing balance depreciation since keeping track of the number of kilometres travelled by each truck will be too onerous for the use of the units of production method. You determine that the correct depreciation rate for the use of the reducing balance method is 60%. Archie has also decided to produce his financial statements on December 31st each year. You come back to Archie with the following tables that show how the Depreciation expense each year and the Carrying Value of the Trucks will vary based on the depreciation method chosen. Cost Price of the trucks Residual value of the trucks. Depreciable Amount of the trucks Delivery Truck Details Straight-line depreciation each year for 4 years Reducing Balance depreciation rate. Cost of Trucks. Accumulated Depreciation Carrying Value... Annual Depreciation Expense Cost of Trucks Accumulated Depreciation Carrying Value. Annual Depreciation Expense 1st Jan 2020 $1,275,000 0 $1,275,000 5 trucks @ $255,000 each 5 trucks @ $6,528 each Straight-Line Depreciation Allocation of the $1,242,360 Depreciable Amount 31st Dec 2020 31st Dec 2021 31st Dec 2022 $1,275,000 $1,275,000 $1,275,000 $310,590 $621,180 $931,770 $964,410 $653,820 $343,230 $310,590 $310,590 $310,590 1st Jan 2020 $1,275,000 $1,275,000 $1,242,360/4 = 60% $1,275,000 $32,640 $1,242,360 $310,590 31st Dec 2020 $1,275,000 $765,000 $510,000 $765.000 Reducing Balance Depreciation Allocation of the $1,242,360 Depreciable Amount 31st Dec 2021 31st Dec 2022 $1,275,000 $1,275,000 $1,071,000 $1,193,400 $204,000 $81,600 $306,000 $122,400 31st Dec 2023 $1,275,000 $1,242,360 $32,640 $310,590 31st Dec 2023 $1,275,000 $1,242,360 $32,640 $48,960 You advise Archie to adopt the straight-line method since you do expect that the trucks will deliver consistent and reliable service for the 4 years provided that they are regularly serviced and maintained. In your opinion, the reducing-balance method does not adequately reveal the usage of their service potential across the 4 years. Archie agrees with you and adopts the straight-line method for financial reporting purposes. Archie is now looking at his financial statements for the year ended December 31st, 2020 which have been prepared using straight-line depreciation. He has managed to produce an operating profit of $200,000 for the 2020 year. His balance sheet on December 31st, 2020 reveals Net Current Assets of $35,590 and his only Non-current Assets are the trucks described above. He turns to you and says "Wouldn't my Return on Capital Employed (ROCE) have been considerably higher if I had used reducing balance depreciation? After all, the carrying value of my Non-current Assets would have been significantly smaller ($510,000 for reducing balance versus $964,410 for straight-line) meaning that I would have made this operating profit using a smaller quantity of capital, so the ROCE would have been higher?" Required: Is Archie correct? Explain using the depreciation schedules shown above and the information provided from the December 31st financial statements. Would his ROCE be "considerably higher" using the reducing balance method compared with use of the straight-line method which is the one you advised him to adopt? In your answer compute the ROCE under both methods. [Maximum 300 words] (10 marks)
Expert Answer:
Related Book For
Posted Date:
Students also viewed these accounting questions
-
The Spongebob Company began business on January 1st 2020 They sell Pineapple homes and each home comes with a 5 year warranty Spongebob sells the pineapple homes for $100,000 each and estimates...
-
Mr. Parks has asked you to advise him on the long-term debt-paying ability of Arodex Company. He provides you with the following ratios: Required a. Give the implications and the limitations of each...
-
A merchandising company has asked you to advise it on how to detect fraudulent financial reporting. Management wants your help in detecting inventory overstatement. Further, management wants to know...
-
Roles define the manager. Do you agree or disagree with this statement? Discuss what you think managers do.
-
The district manager of Jasons, a large discount electronics chain, is investigating why certain stores in her region are performing better than others. She believes that three factors are related to...
-
The figure shows a steel countershaft that supports two pulleys. Pulley C receives power from a motor producing the belt tensions shown. Pulley A transmits this power to another machine through the...
-
The cash flows associated with a project are shown below. The interest rate varies from year to year as shown. Determine an equivalent uniform annual series of cash flows. EOY Cash Flow Interest...
-
The comparative balance sheet of Coulson, Inc. at December 31, 2014 and 2013 is as follows: The noncurrent asset, noncurrent liability, and stockholders equity accounts for 2014 are as follows:...
-
A country produces good X using labor (L) and capital (K), and good Y using L and land (T). Unfortunately they suffer an earthquake in a major city and some of their capital stock is destroyed. a)...
-
Assume the standard deviation of the return on every stock is 40%, and the correlation coefficient between any two stocks is 0.2. The market is perfect and short-selling is not restricted. As for...
-
You are comparing two projects. Using the data below, calculate the CV, SV, SPI, and CPI. Second, use the values to provide the status of each project. All values are in dollars. Project A Project B...
-
Assume you skip the discount and pay at the end of the net period for the following credit terms: 1/10, net 32. Calculate the APY for the trade credit. (Enter your answer as a decimal accurate to...
-
The figure below shows the time-average velocity profiles measured upstream and downstream of a cylinder in an unconfined, incompressible flow that has a free-stream velocity Uo. The wake appears as...
-
Evaluate the performance of EOG Resources Inc. What about the companies' stock prices? Are they fairly evaluated or over or less valued? How can we know their values? EOG Resources Valuation: EPS...
-
Howard has sold a european call option with strike of $181 on MCD for $33.81. What is his profit at expiration, if MCD's price turns out to be $162?
-
In which type of collision are both total momentum and total kinetic energy conserved?
-
A stock is trading at S = $60. There are one-month American calls and puts on the stock with a strike of $60. The call costs $2.50 while the put costs $1.90. No dividends are expected on the stock...
-
A new car sold for $31,000. If the vehicle loses 15% of its value each year, how much will it be worth after 10 years?
-
In each of the following situations, identify which of the twelve principles is at work. a. You choose to shop at the local discount store rather than paying a higher price for the same merchandise...
-
The state needs to raise money, and the governor has a choice of imposing an excise tax of the same amount on one of two previously untaxed goods: the state can tax sales of either restaurant meals...
-
Leandro has 16 hours per day that he can allocate to work or leisure. His job pays a wage rate of $20. Leandro decides to consume 8 hours of leisure. His indifference curves have the usual shape:...
-
According to the static trade-off theory: A. debt should be used only as a last resort. B. companies have an optimal level of debt. C. the capital structure decision is irrelevant.
-
According to the pecking order theory: A. new debt is preferable to new equity. B. new debt is preferable to internally generated funds. C. new equity is always preferable to other sources of capital.
-
Leota Sage saw a local motorcycle dealers newspaper advertisement offering a MetroRider EZ electric scooter for \($1,699.\) When she went to the dealership, however, she learned that the EZ model had...
Study smarter with the SolutionInn App