Question
Vitaem Company, located in Spain, produces and distributes Kombucha. Kombucha is a naturally fermented drink that is obtained by mixing green tea leaves with water
Vitaem Company, located in Spain, produces and distributes Kombucha.
Kombucha is a naturally fermented drink that is obtained by mixing green tea leaves with water and cane sugar, to a bacterium´s colony and yeasts.
Kombucha has a lot of growth potential, and the company anticipates that if it invests in machinery, it will be able to face a 40% growth in turnover.
For this reason, the Chief Financial Officer together with the Chief Executive Officer makes the decision to buy a new machine for the tea cooking automation computer control and temperatures control in the fermentation tanks, and maturation.
They organize a visit to CHINA with a very important manufacturer of this type of machinery, EFICROA.
Finally, on 15th November 2021, the company VITAEM signs the contract for the purchase of the machine with the supplier of fixed assets.
The purchase price of the machine is 250.000 euros.
On 1st January 2022, the machine arrives at Vitaem warehouse for its installation and assembly with the invoice issued by the vendor (250.000 euros)
Vitaem has also incurred the following additional costs related to the machine:
- Invoice number 1 dated December 25th: maritime transport from China to Barcelona. Amount 3.000 euros
- Invoice number 2 dated December 28th: transport insurance concept. Amount 1.000 euros
- Invoice number 3 dated 31st December: for customs procedures and unloading at Barcelona´s port and transport from Barcelona´s port to VITAEM facilities. Amount: 400 euros
Due to the complexity of the machine, it needs installation and assembly. For this service Vitaem contracts the services to the IMM Corporation for an amount of 25.000 euros.
The maintenance for the first year is 2.370 euros.
The company is considering whether to determine annual depreciation using the straight-line method or the declining method at 150 percent of the straight-line rate. Vitaem expects to use the equipment for 10 years, at the end of which it will have an estimated salvage value of 4.000 euros.
In mid-January 2021, the Board of Directors approved the 2021 investment budget. It included a truck´s purchase for the delivery in ecological stores.
Vitaem purchased a truck for 40.000 euros. The truck is expected to be driven 24.000 km per year over a 5 year period and then sold for approximately 5.000 euros.
Vitaem distinctive trademark ¨pure life¨ has been redefined by an important British marketing agency, Lavol. Lavol has issued an invoice that accounts for 4.711 euros. Vitaem considers that will use this design for 10 years.
On the 19th of February 2022, Vitaem purchased a site for 265.000 euros on which it planned to build a flagship store. The site consisted of three acres in Delta de l´Ebre (Tarragona) and included an old house called ¨maset¨half in ruins and Vitaem's plans to demolish it.
Required
- Determine which costs should be included in the cost of the asset (equipment) to calculate annual depreciation.
- Prepare a comparison of the two alternative methods of depreciation of the equipment: a straight-line and declining method for the first two years.
- Determine depreciation for the first year of the truck´s useful life by the straight-line and units of output methods if the truck is actually driven 25.600 Km
- Vitaem needs to book the Lavol´s new trademark design and it has decided that it will use the straight-line method. Please determine the depreciation amount for the first year and the book value.
- Indicate how Vitaem should treat the ¨maset¨ in its financial statement Balance Sheet and explain your reasoning.
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