Fran Filly owns an equine boarding and training facility located in Ascension Parish, Louisiana. On March 30 of 2022, Fran is planning to purchase a used 2012 C&C four-horse trailer with living quarters to allow her to transport animals across the country for her clients. She bought the trailer for $56,300. She is trying to decide what would be the best way to finance and depreciate the trailer. Fran intends to keep the trailer for 8 years and will sell or trade it at the end of that time. She expects that she will be able to get $14,000 for it at that time. Fran has not yet decided how she should account for the depreciation of this trailer for evaluating her management decisions. (She realizes that for tax purposes, her objectives and options are much different.) She has asked you to generate several candidate depreciation schedules each showing the annual depreciation that she will claim over the life of the trailer so that she can compare them. She would like for you to develop schedules based on the (1) straight-line and (3) time-and-a-half declining balance methods. In each case prorate the first year's depreciation according to the actual time that the asset is in service. After you have developed the two schedules, identify how much depreciation Fran would claim under each method for 2024 if she keeps the trailer at least through the end of that year. Further, comment on what you think would happen if Fran kept the trailer longer than the eight years. Note: Make each of your depreciation schedules conform to the sample provided. All depreciation will be claimed as of December 31 of each year. Fran has talked to her banker and finds that she has several options for financing. She can structure the loan as an equal principal payment loan or as an equal total payment loan that will be paid back over a 5-year period. In both cases, she can borrow the funds at 4% interest with payments due annually. If she takes either of these options, she will pay for the vehicles with $1.13 x 10 cash and will finance the remainder with the loan from the bank. The lender also has a no-money-down monthly payment option for a five year loan that has a slightly higher interest rate. If he chooses to do so, he can finance the entire purchase price at a 4.4% annual interest rate with equal total monthly payments over the next 5 years. If Fran chooses the monthly option she will finance the entire purchase. Fran has not yet decided which financing option she will choose. She has asked you to generate the loan payment schedules that correspond to each of the three options outlined above so that she can compare them. In addition, she asks that you calculate the accrued interest on each of the three loans as of January 1, 2024 so that she will have the appropriate information for creating his 2024 accrual basis income statement at year's end regardless of which method he chooses. Comment on which method of financing you think is superior for Fran and give your reasons why. Be sure to discuss any tradeoffs that you might see in the decision. Finally, for only the equal total payment loan with five annual payments, use the loan payment schedule that you developed to determine what values associated with this loan would appear on the January 1, 2024 Market Basis Balance Sheet and the 2023 Accrual Basis Income Statement. Be specific in identifying the amounts and locations where they would appear. (NOTE: Remember that you can use the PMT function in Excel to calculate the payment amount for the Equal Total Payment loans Notes on Declining Balance Methods of Depreciation: Declining Balance methods are accelerated depreciation methods. Unlike straight line or sum-of-the-years- digits methods, however, it is not calculated by first determining the total amount to be depreciated and then spreading it over the years. In this method, the depreciation is calculated based on the outstanding book value the balance in "declining balance"). Depreciation is claimed each year until the book value reaches the salvage value. You will often hear references to double declining balance or time-and-a-half declining balance. That has to do with the calculation of the portion of the outstanding balance that can be claimed for the current year's depreciation. For all declining balance methods, cach year's depreciation is calculated as: Book Value X (Acceleration Factor / Useful Life) - Annual Depreciation For example: Consider a $30,000 pickup that will be depreciated over 5 years using double declining balance with a $5,000 salvage value. (This means an acceleration factor of 2. Time-and-a-half would be 1.5). Using the relationship above: Year 1 Depreciation Year 2 Depreciation - 30,000 X 2/5 - 12,000 Year 1 ending Book Value - 18,000 18,000 X 2/5 = 7,200 Year 2 ending Book Value - 10,800 10,800 X 2/5 4,320 Year 3 ending Book Value - 6,480 6,480 X 2/5 - 2,592 Year 4 ending Book Value - 3,888 Year 3 Depreciation - Year 4 Depreciation But notice that the book value has fallen below the salvage value of $5,000, so we cannot take that amount of depreciation. We are allowed to take only that amount that will leave us with $5,000 book value. Correct Year 4 Depreciation = 6,480 - 5,000 = 1,480 Year 4 ending Book Value = 5,000 No Deprecintion can be claimed beyond Year 4 so Year 5 Depreciation - 0 Year 5 ending Book Value = 5,000 One item of note: Since the book value is repeatedly being multiplied by some constant fraction (2/5 or 40 in the example above), it is often not possible to use this method to depreciate an asset to a low salvage value within the useful life. This problem is addressed by switching to the straight-line method late in the life of the asset when the straight-line depreciation of the remaining book value over the remaining useful life would exceed the annual depreciation that could be claimed if declining balance was used at that time. We'll look at this case in class but you won't be held accountable to addressing these circumstances. This will become particularly relevant when we discuss IRS-approved depreciation methods late in the term. Fran Filly owns an equine boarding and training facility located in Ascension Parish, Louisiana. On March 30 of 2022, Fran is planning to purchase a used 2012 C&C four-horse trailer with living quarters to allow her to transport animals across the country for her clients. She bought the trailer for $56,300. She is trying to decide what would be the best way to finance and depreciate the trailer. Fran intends to keep the trailer for 8 years and will sell or trade it at the end of that time. She expects that she will be able to get $14,000 for it at that time. Fran has not yet decided how she should account for the depreciation of this trailer for evaluating her management decisions. (She realizes that for tax purposes, her objectives and options are much different.) She has asked you to generate several candidate depreciation schedules each showing the annual depreciation that she will claim over the life of the trailer so that she can compare them. She would like for you to develop schedules based on the (1) straight-line and (3) time-and-a-half declining balance methods. In each case prorate the first year's depreciation according to the actual time that the asset is in service. After you have developed the two schedules, identify how much depreciation Fran would claim under each method for 2024 if she keeps the trailer at least through the end of that year. Further, comment on what you think would happen if Fran kept the trailer longer than the eight years. Note: Make each of your depreciation schedules conform to the sample provided. All depreciation will be claimed as of December 31 of each year. Fran has talked to her banker and finds that she has several options for financing. She can structure the loan as an equal principal payment loan or as an equal total payment loan that will be paid back over a 5-year period. In both cases, she can borrow the funds at 4% interest with payments due annually. If she takes either of these options, she will pay for the vehicles with $1.13 x 10 cash and will finance the remainder with the loan from the bank. The lender also has a no-money-down monthly payment option for a five year loan that has a slightly higher interest rate. If he chooses to do so, he can finance the entire purchase price at a 4.4% annual interest rate with equal total monthly payments over the next 5 years. If Fran chooses the monthly option she will finance the entire purchase. Fran has not yet decided which financing option she will choose. She has asked you to generate the loan payment schedules that correspond to each of the three options outlined above so that she can compare them. In addition, she asks that you calculate the accrued interest on each of the three loans as of January 1, 2024 so that she will have the appropriate information for creating his 2024 accrual basis income statement at year's end regardless of which method he chooses. Comment on which method of financing you think is superior for Fran and give your reasons why. Be sure to discuss any tradeoffs that you might see in the decision. Finally, for only the equal total payment loan with five annual payments, use the loan payment schedule that you developed to determine what values associated with this loan would appear on the January 1, 2024 Market Basis Balance Sheet and the 2023 Accrual Basis Income Statement. Be specific in identifying the amounts and locations where they would appear. (NOTE: Remember that you can use the PMT function in Excel to calculate the payment amount for the Equal Total Payment loans Notes on Declining Balance Methods of Depreciation: Declining Balance methods are accelerated depreciation methods. Unlike straight line or sum-of-the-years- digits methods, however, it is not calculated by first determining the total amount to be depreciated and then spreading it over the years. In this method, the depreciation is calculated based on the outstanding book value the balance in "declining balance"). Depreciation is claimed each year until the book value reaches the salvage value. You will often hear references to double declining balance or time-and-a-half declining balance. That has to do with the calculation of the portion of the outstanding balance that can be claimed for the current year's depreciation. For all declining balance methods, cach year's depreciation is calculated as: Book Value X (Acceleration Factor / Useful Life) - Annual Depreciation For example: Consider a $30,000 pickup that will be depreciated over 5 years using double declining balance with a $5,000 salvage value. (This means an acceleration factor of 2. Time-and-a-half would be 1.5). Using the relationship above: Year 1 Depreciation Year 2 Depreciation - 30,000 X 2/5 - 12,000 Year 1 ending Book Value - 18,000 18,000 X 2/5 = 7,200 Year 2 ending Book Value - 10,800 10,800 X 2/5 4,320 Year 3 ending Book Value - 6,480 6,480 X 2/5 - 2,592 Year 4 ending Book Value - 3,888 Year 3 Depreciation - Year 4 Depreciation But notice that the book value has fallen below the salvage value of $5,000, so we cannot take that amount of depreciation. We are allowed to take only that amount that will leave us with $5,000 book value. Correct Year 4 Depreciation = 6,480 - 5,000 = 1,480 Year 4 ending Book Value = 5,000 No Deprecintion can be claimed beyond Year 4 so Year 5 Depreciation - 0 Year 5 ending Book Value = 5,000 One item of note: Since the book value is repeatedly being multiplied by some constant fraction (2/5 or 40 in the example above), it is often not possible to use this method to depreciate an asset to a low salvage value within the useful life. This problem is addressed by switching to the straight-line method late in the life of the asset when the straight-line depreciation of the remaining book value over the remaining useful life would exceed the annual depreciation that could be claimed if declining balance was used at that time. We'll look at this case in class but you won't be held accountable to addressing these circumstances. This will become particularly relevant when we discuss IRS-approved depreciation methods late in the term