Meteor Delivery Services operates a delivery and messenger service in the metropolitan area and surrounding state of
Question:
Meteor Delivery Services operates a delivery and messenger service in the metropolitan area and surrounding state of a major city located in the southern US. Meteor delivers a large variety of things, from materials, products, medical supplies, printed material, auto parts, office supplies, computer parts, home health products, audio/video equipment, gifts, lab results, and legal, accounting and architectural documents. Meteor services include warehousing & distribution. Meteor’s delivery fleet includes cars, pickups, vans and trucks. In addition, the company uses professionally trained bicyclists and walkers to handle many of its downtown deliveries. Meteor’s accounting policies for its delivery fleet are:
• It states property and equipment on the basis of cost.
• For financial reporting purposes, it records depreciation of property and equipment on a straight-line basis over the asset’s service life or related lease term. For income tax purposes, it computes depreciation using accelerated methods.
• It capitalizes expenditures for major additions, improvements, modifications and overhaul costs when it determines such costs extend the useful life of the asset. It charges to expense as incurred maintenance and repair expenditures.
• It reviews the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted. The company’s delivery fleet includes approximately 50 Ford Econoline Cargo vans (E-150 3 door with 4.6L 8 cylinder engines), which it depreciates using a five-year useful life. Current balance sheet information on its Ford vans is as follows (dollars in thousands):
• Cost $1,127
Accumulated depreciation $521
• Net book value $606 1
1. Assume that the company is thinking about adopting IFRS and that Meteor elects to use the revaluation model for its delivery fleet. Below is the estimated fair value (i.e., wholesale market price) of a Ford Econoline van of differing ages. Given this information, discuss the possible financial statement consequences if the company were to depreciate its delivery equipment using 200% declining balance versus its current method of straight-line.
Ford E-150 Cargo Van (1)
Age - Estimated Market Price (2)
New - $23,940
1 year old - $11,083
2 year old - $8,485
3 year old - $7,033
4 year old - $5,851
5 year old - $5,103
(1) 3-door, 4.6L 8-cylinder engine.
(2) Wholesale market price
Statistics for Business and Economics
ISBN: 978-0132930192
8th edition
Authors: Paul Newbold, William Carlson, Betty Thorne