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Communication Godwin Co. owns three delivery trucks. Details for each truck at the end of the most recent year follow: Age Expected Useful Life Initial Cost Accumulated Depreciation Truck 1 3 6 $22,500 $11,250 Truck 2 5 6 26,250 21,875 Truck 3 2 6 28,500 9,500 At the beginning of the year, a hydraulic lift is added to Truck 1 at a cost of $4,500. The addition of the hydraulic lift will allow the company to deliver much larger objects than could previously be delivered. At the beginning of the year, the engine of Truck 2 is overhauled at a cost of $5,000. The engine overhaul will extend the truck’s useful life by three years. Write a short memo to Godwin’s chief financial officer explaining the financial statement effects of the expenditures associated with Trucks 1 and 2.

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Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
BuyFindarrow_forward

Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
Chapter 9, Problem 9.3TIF
Textbook Problem
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Communication

Godwin Co. owns three delivery trucks. Details for each truck at the end of the most recent year follow:

  Age Expected Useful Life Initial Cost

Accumulated

Depreciation

Truck 1 3 6 $22,500 $11,250
Truck 2 5 6 26,250 21,875
Truck 3 2 6 28,500 9,500
  • At the beginning of the year, a hydraulic lift is added to Truck 1 at a cost of $4,500. The addition of the hydraulic lift will allow the company to deliver much larger objects than could previously be delivered.
  • At the beginning of the year, the engine of Truck 2 is overhauled at a cost of $5,000. The engine overhaul will extend the truck’s useful life by three years.

Write a short memo to Godwin’s chief financial officer explaining the financial statement effects of the expenditures associated with Trucks 1 and 2.

To determine

Capital expenditure: It refers to the amount spent on acquiring, maintaining, and improving the fixed assets that increases its productivity or extends useful life. It provides benefits in the future period.

To Write: a short memo to the Chief Financial Officer of Company G explaining the financial statement effects of the expenditures associated with Trucks 1 and 2.

Explanation of Solution

Write a short memo to the Chief Financial Officer of Company G explaining the financial statement effects of the expenditures associated with Trucks 1 and 2.

MEMO

From: ABC

To: Mr. XYZ

CFO, Company G

Dated: 26th February, 20XX

Re: Financial statement effects of theexpenditures associated with Trucks 1 and 2.

Sir,

At the beginning of the year, a hydraulic lift of $4,500 was added to the Truck 1. This modification improved the productivity of the truck as it improved its capability of delivering much larger objects. Thus, the cost of the hydraulic lift was depreciated over the remaining estimated useful life of the Truck 1 as the cost of the truck is increased due to the hydraulic lift. As a result, this expenditure would increase the amount of the depreciation expense, thereby reducing the net income...

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Chapter 9 Solutions

Corporate Financial Accounting
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