Natalie is thinking of buying a van that will be used only for business. She estimates that she can buy the van for $28,400. Natalie would spend an additional $3,000 to have the van painted. As well, she wants the back seat of the van removed so that she will have lots of room to transport her mixer inventory and baking supplies. The cost of taking out the back seat and installing shelving units is estimated at $1,600. She expects the van to last about five years and to be driven for 200,000 km. The annual cost of vehicle insurance will be $1,440. Natalie estimates that at the end of the five-year useful life, the van will sell for $5,000. Assume that she will buy the van on April 15, 2014, and it will be ready for use on May 1, 2014.

Natalie is concerned about the impact of the van's cost and related depreciation on Cookie Creations' income statement and balance sheet.

Instructions

(a) Determine the cost of the van.

(b) Prepare depreciation schedules for the life of the van under the following depreciation methods:

1. Straight-line.

2. Diminishing-balance at double the straight-line rate.

3. Units-of-production. It is estimated that the van will be driven as follows: 30,000 km in 2014, 37,500 km in 2015, 40,000 km in 2016, 47,500 km in 2017, 35,000 km in 2018, and 10,000 km in 2019.

Recall that Cookie Creations has a December 31 year end.

(c) Which method of depreciation would result in the highest profit for the year ended December 31, 2014? Over the life of the asset?

(d) Which method would result in the van's highest carrying amount for the year ended December 31, 2014? Over the life of the asset?

(e) Which method would result in the least cash used for the year ended December 31, 2014? Over the life of the asset?

(f) Which method of depreciation would you recommend that Natalie use? Why?