Question

19 What is the depreciation expense for each equipment purchased should Johnson Ltd. charge for the first year knowing that it uses 200% declining balance method (refer to Question (15) above)? Justify your answer.

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15 Johnson Ltd. bought a fleet of vans for deliveries for $1,215,000. They decided to pain them in the company’s colours costing $35,000 and also to fit them with appropriate shelves and tail lifts costing $225,500 in total. The management is keen to provide the drivers with a good working conditions, so they subscribed for a 30 minutes massage service per week for each driver costing a total of $25,000. They also paid $20,000 to register the vehicles, and $30,000 to fit them with GPS tracking devices. What is the cost basis for the delivery van? Justify your answers.

Cost basis of delivery van:	Amount
Add: van purchased cost	$ 1,215,000
Shelves and tail lift fitting charges	225,500
Vehicle registration charges	20,000
GPS fitting charges	30,000
Total capitalized cost of van	$ 1,490,500

Answer 1

15.

Cost basis of delivery van	Amount
Purchase cost	$ 1,215,000
Cost of painting	35,000
Shelves and tail fitting charges	225,500
Vehicle registration charges	20,000
GPS fitting charges	30,000
Total capitalized cost of van	$ 1,525,500

Note : As the cost of painting the vans is incurred before they are put into service, it must be capitalized. However, the subscription charge for the massage service for the van drivers is a prepaid revenue expense, because the expense will be incurred only after the vehicles are put into use.