Problem 23 - Accounting

Question

On the first day of the fiscal year, a delivery truck with a list price of \( 86,500\) was acquired in exchange for an old delivery truck and \( 75,000\) cash. The old truck had a book value of \( 15,675\) at the date of the exchange. a. Determine the depreciable cost for financial reporting purposes. b. Assuming that the book value of the old delivery truck was \( 6,000\), determine the depreciable cost for financial reporting purposes.

Step-by-Step Solution

Answer

a. Depreciable cost: 90,675; b. Depreciable cost: 81,000.

Step 1: Understand the Transaction

The new delivery truck has a list price of \( 86,500 \) and the payment includes trading in an old truck plus \( 75,000 \) cash. The value of the old truck is needed for the transaction, which is its book value.

Step 2: Calculate Total Cost of New Truck for Part a

For financial reporting, the cost of the new truck is the cash paid plus the book value of the old truck given up. Here, the book value of the old truck is \( 15,675 \). Therefore, the total cost of the new truck is \( 75,000 + 15,675 = 90,675 \).

Step 3: Calculate Depreciable Cost for Part a

The depreciable cost is simply the total cost calculated since there is no residual value mentioned. So, the depreciable cost for part a is \( 90,675 \).

Step 4: Calculate Total Cost of New Truck for Part b

In part b, the book value of the old truck is \( 6,000 \). So, the cost of the new truck becomes \( 75,000 + 6,000 = 81,000 \).

Step 5: Calculate Depreciable Cost for Part b

The total cost of \( 81,000 \) becomes the depreciable cost in part b, as no residual value is mentioned. Therefore, the depreciable cost for part b is \( 81,000 \).

Key Concepts

Book Value

The book value of an asset is a central concept in understanding asset transactions. It is the value of an asset as recorded in a company's financial statements, which reflects the original cost minus any accumulated depreciation. The accumulated depreciation accounts for any wear and tear or usage of the asset over time.
When an asset, such as a delivery truck, is exchanged or replaced, its book value plays a crucial role in determining the worth contributed to the new asset. For example, if an old truck is traded for a new one, the book value of the old truck represents how much it is still considered useful according to the books. If the old truck's book value is high, it implies the truck has not yet lost much of its depreciable value.
In the given problem, two different book values for the old truck are used to calculate the total cost of acquiring a new truck. These values guide how much of the new truck's cost is considered an exchange versus additional investment.

Financial Reporting

Financial reporting is the process of disclosing financial information to various stakeholders about how a company is performing financially. It helps stakeholders make informed decisions by providing insight into the company's financial health.
In the context of asset exchanges, financial reporting involves accurately recording the cost of the new asset. The cost includes not only the cash outflow but also the book value of any traded-in assets. This comprehensive cost becomes the basis for calculating depreciation over the asset's useful life.
For financial reporting purposes, it is important that asset transactions are correctly recorded. This ensures that the financial statements paint an accurate picture of the company's asset base and invested capital. In particular, the depreciable cost determined through such transactions affects the depreciation expense in the income statement, which in turn influences the net income reported.

Asset Exchange

Asset exchange is a transaction where one asset is traded for another. This commonly occurs in businesses when older equipment or vehicles are traded for new ones. A critical aspect of asset exchange is determining the real cost of acquiring the new asset, which involves both direct payment and the value of the traded-in asset.
In the exercise scenario, a new delivery truck is acquired through an exchange that includes an old delivery truck plus additional cash. The value brought into this transaction by the old truck is measured by its book value. The total cost of the acquisition thus combines both the cash paid and this book value, to ensure a fair and comprehensive valuation.
Asset exchange allows companies to maintain or enhance their operational capabilities without incurring excessive cash outflows. It can be an efficient and strategic method of asset management, as long as the book value is accurately assessed and recorded during the exchange process.