– The delivery truck was repainted with a new company logo at a cost of $1,000.

– To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.

– The truck’s engine was overhauled at a cost of $4,000.

1. Determine which of those costs should be capitalized. Also identify and analyze the effect of the capitalized costs. Assume that all costs were incurred on January 1, 2014.  

2. Determine the amount of depreciation for the year 2014. The company uses the straight-line method and depreciates the building over 25 years and the truck over six years. Assume zero residual value for all assets. 

3. How would the assets appear on the balance sheet of December 31, 2014?

Problem 8-3 Book versus Tax Depreciation,

Griffith Delivery Service purchased a delivery truck for $33,600. The truck has an estimated useful life of six years and no salvage value. For purposes of preparing financial statements, Griffith is planning to use straight-line depreciation.  For tax purposes, Griffith follows MACRS.  Depreciation expense using MACRS is $6,720 in Year 1, $10,750 in Year 2, $6,450 in Year 3, $3,870 in each of Years 4 and 5, and $1,940 in Year 6. 

1. What is the difference between straight-line and MACRS depreciation expense for each of the six years?

2. Grifith’s president has asked why you use one method

Problem 8-4 Depreciation and Cash Flow

O’hare Company’s only asset as of January 1, 2014, was a limousine. During 2014, only the following three transactions occurred:

Services of $100,000 were provided on account.

All accounts receivable were collected.

Depreciation on the limousine was $15,000.