Week 11 — One Van, Five Years: Cost, Depreciation, and a Sale — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 10 of the term — measure the bicycle shop's delivery van, depreciate it by three methods, record its sale, and set a founder straight about what depreciation does and does not measure.

This week you met the cost of a long-lived asset, depreciation as cost allocation, the straight-line, units-of-production, and double-declining-balance methods, book value, the disposal of an asset, and intangible assets and natural resources. In this assignment you work four short problems on the bicycle shop's delivery van, interpret each one, and explain this week's ideas to someone who has them wrong. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles. It builds on Week 4, where you recorded the shop's first depreciation as an adjusting entry that touches one income statement account and one balance sheet account and never Cash.

The task

This week's material is pinned. The cost of a long-lived asset is everything needed to acquire it and get it ready for use, such as the price, freight, and setup. Depreciation is the allocation of a long-lived asset's cost to the periods that use it; it is not a measure of market value and is not a cash payment. The straight-line method records (cost − residual value) ÷ useful life each year. The units-of-production method records (cost − residual value) ÷ total expected units × units used. The double-declining-balance method multiplies book value at the start of each year by twice the straight-line rate and stops when book value reaches residual value. The gain or loss on disposal is the cash received minus the asset's book value on the date of sale. GAAP allows each method, and this course compares them by their effects, never as better or worse.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. The shop buys a delivery van to bring repaired bicycles back to customers, expects to use it for 5 years or 90,000 miles, and later sells it.

One of the founders (an illustrative person) sends you this message: "That $1,500 delivery fee is a cost of doing business, so let's put it in this month's expenses. Depreciation is how much the van loses in value, and straight-line is the best method anyway. And when we sell the van for $12,500, that's a $12,500 gain." Your job is to answer the way this course would, starting from four small calculations on the shop's books.

Work these four problems, showing your arithmetic:

1. The bicycle shop buys a delivery van for a price of $28,000, pays $1,500 of freight to have it delivered, and pays $500 to set it up to carry bicycles. It expects a $3,000 residual value and a 5-year useful life. How many dollars of straight-line depreciation does it record each year?
2. The bicycle shop's delivery van cost $30,000, has a $3,000 residual value, and is expected to be driven 90,000 miles. In its first year it is driven 20,000 miles. How many dollars of units-of-production depreciation does the shop record for that year?
3. The bicycle shop's delivery van cost $30,000 and has a 5-year useful life, so its double-declining-balance rate is twice the straight-line rate. How many dollars of double-declining-balance depreciation does the shop record in Year 2?
4. The bicycle shop's delivery van cost $30,000 and is depreciated by straight-line at $5,400 a year. At the end of Year 3 the shop sells it for $12,500 in cash. How many dollars of gain or loss does the shop record on the sale, and which is it?

Beside each answer, add one brief interpretation:

• Problem 1: state the van's cost and explain why the freight and setup belong in it; write the year-end depreciation entry as a journal entry, debit first and credit second; and say why the entry does not touch Cash.
• Problem 2: give the per-mile rate and the van's book value at the end of Year 1 under this method; and explain what makes one year's depreciation larger or smaller than another's.
• Problem 3: give the rate, Year 1's depreciation, and the book value at the end of Year 2; explain why the last year's depreciation is only $888; and compare Year 1 with straight-line's $5,400 by its effect on net income, not as better or worse.
• Problem 4: give the book value at the sale; write the sale entry as a journal entry, all debits first and the credit second; and explain why the $12,500 is not a gain.

Explain it to a non-expert

The founder means well and has four things wrong. Write a 3–5 sentence message that explains why the $1,500 freight is part of the van's cost, why depreciation is not the van's loss in market value, why the course compares the methods by their effects instead of naming a best one, and why the sale is a $1,300 loss rather than a $12,500 gain. Name one limit, such as that the residual value and useful life are the shop's own estimates, or that tax depreciation is outside this course. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a friend who buys a used camera for side work and says, "My camera is worth less every month, so that drop is my depreciation." Model answer: "Depreciation is not what your camera would sell for today; it spreads what you paid for it across the years you plan to use it. If you paid for it once and plan to use it for several years, each year carries a fair share of that price. A fair caveat: the number of years is your own estimate, so revisit it if the camera wears out sooner."

Use that pattern for the founder, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the figures in the problems without guessing which figures or steps you used.

Deliverables

Submit a single report containing:

• the four results, each with the division, multiplication, or subtraction shown and the brief interpretation the task names for that problem;
• the journal entries: the purchase of the van, the year-end straight-line depreciation, and the sale at the end of Year 3, each with the debits first, the credits second, and equal totals;
• the book values the problems ask for under each method;
• your message to the founder, explaining why the freight is part of the cost, why depreciation is not market value, why the methods are compared by their effects, and why the sale is a loss, with one limit; and
• a one-line restatement of the figures you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled spreadsheet of the depreciation schedules and the entries with a short explanation. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the arithmetic, the entries, the interpretations, and the writing yourself. You may use a calculator or a spreadsheet for the arithmetic. State a rule only as the course states it, describe the depreciation methods by their effects rather than ranking them, check every entry so that its debits equal its credits, and give no tax or investment advice. Submitting work you did not write as your own, or copying another student's work, is an integrity violation under the course policy.

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