"Quantum Construction is considering the purchase of a used dump truck. Most of the financing will come from Hiper National Bank, and the loan officer at Hiper National Bank, Jesus Fernandez, is quite interested in seeing the impact of the new truck on the future income statements and balance sheets of Quantum Construction. The general manager of Quantum Construction, Kirk Tennant, who you work for, wants you to prepare various schedules showing the impact of purchasing the dump truck under various depreciation methods.
Kirk Tennant supplied you with the following information. The dump truck will cost $57,000. Before placing the truck in service, Quantum will need to spend $1,600 painting it, $1,200 replacing the tires and $4,500 overhauling the engine. Without the overhaul the useful life of the truck would be only two years, with the overhaul the dump truck will remain in service six (6) years and have a residual value of $12,000. The truck’s annual expected mileage is expected to be 17,000 miles in each of the first four years and 8,000 miles in each of the last two years. Tennant has asked that you prepare schedules showing the depreciation expense, accumulated depreciation, and book value of the asset in each of the six years under each of the four depreciation models that can be used by Quantum – two times declining balance, sum-of-year’s-digits, straight-line and units of production.
In addition, Tennant also indicated that cash flow (net income) before depreciation and taxes is expected to be $150,000 for the first year of the truck’s life, varying each year by scheduled construction. The following expected changes from the $150,000 cash flow (net income) before depreciation and taxes over the next five years are: $17,000, -$8,000, $16,000, -$19,000, $17,000. Assuming the income tax rate is 36% for Quantum the first year and the following rates in each of the next five years respectively, 26%, 30%, 32%, 30%, and 34%, Tennant wants to know the after-tax net income and after-tax cash flows provided for each year of the truck’s life. Also, Kirk Tennant wants you to show the fixed asset section of the balance sheet for the truck in each of the years, under each of the depreciation methods. After your analysis, Kirk Tennant wants your recommendations on what depreciation method to use to report to Jesus Fernandez and what method to use for the taxing authority. Put the various documents you create into a report to be given to Kirk Tennant.
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