Question

1. Speedy delivery service recently hired a new accountant who discovered that the prior accountant had erroneously capitalized on routine repair and maintenance costs on delivery trucks. The costs were added to the overall trucks’ book values and depreciated over time. How should Speedy have recorded routine maintenance and repair costs? What effect did the error have on Speedy’s balance sheet and income statement?

2.Speedy Delivery has a very lazy accountant. When originally setting up the delivery trucks into the accounting system, the accountant did not want to calculate the expected salvage value for each vehicle. He left salvage value at $0 even though this is not the case. Explain what leaving the salvage value at $0 would do for depreciation.

Answer 1

1.) Speedy should have recorded routine maintenance and repair costs in Income Statement instead fof Capitalizing on delivery trucks. Delivery Trucks on Speedy’s balance sheet is Overstated due to Capitalization of repair & maintenance costs and income statement is also Overstated due this error because the cost should be expensed out whereas it has been capitalized & being depreciated over the time.

2.) The Salvage value at $ 0 will result in more depreciation expense in the Income statement & Less Book value of Delivery Trucks in Balance Sheet because the salvage value reduce the total depreciation expense over the time.