Joe Heffernan decided to start a snow removal business in his neighborhood, which he called Snow Care.
Question:
Joe Heffernan decided to start a snow removal business in his neighborhood, which he called Snow Care. He invested his used truck into the business on November 1, 2020. Joe had purchased the truck on November 1, 2017, for $16,900. He looked up the fair market value of his truck on a popular web site and arrived at a value for his truck of $9,900 as of November 1, 2020. At that time, he used $3,700 from his savings account to pay for the overhaul needed in order to prepare the truck for pushing a heavy plow. Then, after investing additional cash into the business, Snow Care was able to purchase, on November 5, a brand new snow plow to be attached to the truck, at a cost of $7,480. The apparatus to attach and operate the plow cost $1,900.
In order to operate the truck on the streets, Joe was required to upgrade his driver’s license at a cost of $480 per year ($40 per month), add commercial use to his truck insurance at $100 per month, and purchase a $3,780 business license that was valid for one year.
Based on its seasonal operations, Joe determined that his business should depreciate the truck and plow using the units-of-production method. When making this decision, Joe also considered the estimate of the residual values of these two assets. He believes that the truck will last another four years and be driven a total of 68,000 kilometers, at which time it could be sold for $680. In the case of the plow, estimated units of production will also be 68,000 kilometers and the residual value is expected to be $1,900, after four years of use.
Snow Care used the truck for 1,700 kilometers in the fiscal year ended December 31, 2020 and 15,300 kilometers during the fiscal year ended December 31, 2021.
(a)
What costs should Snow Care use to record the investment of the truck and the purchase of the plow?
| Cost of the truck: | ||
| $ | ||
| Total cost | $ |
| Purchase of the plow: | ||
| $ | ||
| Total cost | $ |
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Expert Answer:
Question Cost to prepare the truck 3700 Value of the truck when transferred 9900 Cost of the Truck 1... View the full answer
