Question : Question economic reality of the delivery equipment, and we can improve : 1161769

Question

economic reality of the delivery equipment, and we can improve our bottom line by using that depreciation method. Temecula used and depreciated its delivery equipment through 2016. An internal sudit of the frm’s long-term assets in January 2017 revealed that the delivery equipment only had a value of $220,000. This diminshed value was Chapter 4 CASE 4-1 Temecula Inc. began business on January 1, 2015 as a wholesale distributor of general caused by excessive use and poor gas mileage relative to newer vehicles. Andrea Accrual merchandise to discount variety stores. Due to capital constraints, Temecula purchased mmedistely recognized the trucks as impaired and adjusted the book value and depre- a used feet of delivery trucks to deliver inventory to its customers when it began bus ction schedule according ness. Recent events have caused Temecula’s maragement to consider upgrading its delivery fleet By the beginning of 2018, Temecula became concerned that its ineficient delivery fleet placed the firm at a competitive disadvantage. The firm decided to secure debt The firm initially invested $600,000 for its delivery trucks at the beginning of opers- cing from its bank to upgrade its trucks. Chief Financial Officer, Kesha Money tions on Jaary 1, 2015. Temecula placed them into service immediately. All of the commented the Erm’s good credit standing would allow Temecula to borrow up to $1.2 million at 4%”The term loan would require Temecula to pay annual interest on the trucks were the same age with approximately the same mileage. Consequently, Temecula decided to depreciate the trucks collectively as an asset entitled Delivery Equipment The head of Temecula’s facilities management, Turk Wrench, estimated that the trucks had a useful service life of six years. He further commented, “All trucks will be totaly worthless after we’re through with them. debt, and repay the principal upon maturity Bil Buver, director of purchasing and acquisitions, identifßed a possible replace- was a tleet of new diesel trucks. The cost would be 8800,000 and the diesel vehicles promised savings of $160,000 annually in fuel costs due to greater fuel efficiency than the carrent gas gzzlers. The diesel trucks, however would requlre an extra $20,000 in annual maintenanoe costs diue to their sophisticated ment Beet. One potential acquistion b a Temecula’s chief accountant decided to depreciate the delivery equipment on a straight-line basis. Andrea Accrual stated, “Straight-line depreciation best reflects the economic reality of the delivery equipment, and we can improve our bottom line by using that depreciation method. Temecula used and depreclated its delälvery equlpment through 2016. An internal audit of the firm’s long-term assets in January 2017 revealed that the delivery equipment only had a value of $220,000. This diminished value was caused by excessive use and poor gas mileage relative to newer vehicles. Andrea Accrual immediately recognized the trucks as impaired and adjusted the book value and depre- ciation schedule according. B.G. Shot, the Chlef Executive Offcer of Temeeula, called the personnel involved to a meeting on Junuary 2, 2018. B.G. sald, “If f we make the Livestment, I want to seu the want to fleet aher three years becsuse I want to maintain a highly efficient Seet, and I don’t want to revisit an impaired asset situation.”Bill Buyer, in consaltation with Turk Wrench, said, If that’s the case, we could sell the trucks for $425,000 after three years of use. Kesha trucks Money noted thl Money noted that a buyer existed who was willing to pay $100,000 for the old delivery trucks She sald, “Tm afraid it’s the best price we cun get for those dinossurs. Andrea Accrual chimed in, Just like the old tracks, we would depreclate the new teet on a By thé beginning of 2018, Temecula became concerned that its inelicient delivery strsight-line basis to enaximixe our profis if we bay the new trucks fleet placed the irm at a competitive disadvantage. The firm decided to secure debc financang from its bank to upgrade its trucks, Chief Financial Obcer, Kesha Money, commented the firm’s good credit standing would allow Temecula to borrow up to $1.2 mi lionat 4% n s good credit standing wou , Kesha $1.2 million at 4%·The tenn loan would require Tetecula to pay annual interest on the debt, and repay the principal upon maturity Bill Buyer, director of purchasing and dentifled a possible replace- Gain (loss) on sale Cast yourself in the role of Andrea Accrual. Write an executive summary either in sup of or against acquiring the new delivery equipment. Also, sate wy you beleve strai Balance Sheets 1212012/31/19 12/3118 depreciation is a better method than accelerated depreclation from a proftab Delivery equipment, cost standpoint. To reflect the history of the delivery equipment and to support your decis Less: complete the following financial information. accumulated depreciation Delivery equipment, net of depreclation Historieal Financial Data 2017 2016 2105 Expected Financial Data-Retain Old Delivery Equipment expense Loss due to impairment 2020 2019 2018 Balance Sheets 12811712/31/16 123115 Delivery equipment, cost Balance Sheets 12/31/2012/31/19 12/31/18 Delivery equipement, cost Less accumulated depreciation Delivery equipment, net of depreciation Delivery equipment, net of depreciation Expected Financial Data Purchase of New Delivery Equipment Income Statements 2020 2019 2018 Reduced operating expenses) Gain (loss) on sale Balance Sheets 12/31/20 1231/19 1231/18 Delivery equipment, cost Delivery equipmenit, net dr a Alir MacBook A PIC COLLAGE