Adams Brothers Outdoor Adventures currently owns a 12-passenger van that is used to transport clients to and from its outdoor adventure sites. The van was purchased 4 years ago at a cost of $20,000. At that time, its useful life was estimated to be 5 years with a salvage value of $5,000 at the end of its useful life. The van is in need of some major repairs at this time. It needs a new engine and transmission, new tires, and other minor miscellaneous repairs. The engine and transmission are estimated to cost $4,000 and will extend the useful life of the van by 5 years. The estimated salvage value at the end of the 5 years is $7,000. The new tires and other repairs are estimated to cost $1,200. Sam and George are trying to decide if they should repair the existing van or trade it in for a new van. A local dealer has offered a trade in of $6,000 on a new van costing $30,000. If the new van is purchased, Sam and George plan to depreciate it using the units of production method. The units would be based on the number of miles driven. The new van is expected to have a salvage value of $10,000 after its useful life of 100,000 miles.
Develop a report for Sam and George recommending a course of action regarding the van. In this report, show the calculations for depreciation expense for the existing van (how depreciation is currently being expensed), the repaired van (depreciation expense if the existing van is repaired), and the new van (explain how depreciation would be calculated if the new van is purchased). Additionally, explain how you record each of the decision options (a) repair the existing van or (b) trade in the van for a new van. Show the journal entries you would record if (a) the existing van is repaired or (b) a new van is purchased. Explain how you would account for the repairs on the existing van (are they expenses or assets? Or both?). Provide the journal entries that would record either decision.
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