X Chapter 4 CASE Temecula Inc. began business on January 1, 2020 as a wholesale distributor of general merchandise to discount variety stores. Due to capital constraints, Temecula purchased a used fleet of delivery trucks to deliver inventory to its customers when it began busi- ness. Recent events have caused Temecula's management to consider upgrading its delivery fleet The firm initially invested $600,000 for its delivery trucks at the beginning of opera- tions on January 1, 2020. Temecula placed them into service immediately. All of the trucks were the same age with approximately the same mileage. Consequently, Temecula decided to depreciate the trucks collectively as an asset entitled Delivery Equipment The head of Temecula's facilities management, Turk Wrench, estimated that the trucks had a useful service life of six years. He further commented, "All trucks will be totally worthless after we're through with them." Temecula's chief accountant decided to depreciate the delivery equipment on a straight-line basis. Andrea Accrual stated, "Straight-line depreciation best reflects the economic reality of the delivery equipment, and we can improve our bottom line by using that depreciation method. Temecula used and depreciated its delivery equip ment through 2021. An internal audit of the firm's long-term assets in January 2022 revealed that the delivery equipment only had a value of $220,000. This diminished value was caused by excessive use and poor gas mileage relative to newer vehicles. Andrea Accrual immediately recognized an $180,000 impaired loss (an expense) on the trucks on January 1, 2022. The firm began depreciating the new book value of the tracks over the remaining four years in 2022. By the beginning of 2023, Temecula became concerned that its inefficient delivery fleet placed the firm at a competitive disadvantage. The firm considered debt financing from its bank to upgrade its trucks. Chief Financial Officer, Kesha Money, commented the firm's good credit standing would allow Temecula to borrow at 4% annually. A term loan would require Temecula to pay annual interest on the debt, and repay the principal upon maturity. Bill Buyer, director of purchasing and acquisitions, identified a possible replace ment feet. One potential acquisition was a fleet of new diesel trucks. The cost would be $800,000 and the diesel vehicles promised savings of $160,000 annually in fuel costs due to greater fuel efficiency than the current gas guzzlers. The diesel trucks, however, would require an extra $20,000 in annual maintenance costs due to their sophisticated engineering B.G. Shot, the Chief Executive Officer of Temecula, called the personnel involved to a meeting on January 2, 2023. B.G. said, "If we make the investment, I want to sell the fleet after three years because I want to maintain a highly efficient fleet, and I don't want to revisit an impaired asset situation." Shot also said, "If we borrow money, we will repay the loan when we sell the new trucks." Bill Buyer, in consultation with Tark Wrench, said, "If that's the case, we could sell the trucks for $425,000 after three years of use." Kesha Money noted that a buyer existed who was willing to pay $100,000 for the old delivery trucks. She said, "Tm afraid it's the best price we can get for those dinosaurs." Andrea Accrual chimed in, "Just like the old trucks, we would depreciate the new fleet on a straight-line basis to maximize our profits if we buy the new trucks." CFO Carlos Cash stated, "We forecast 8600,000 of income before depreciation, gains or losses on sales, interest, and fuel annually from 2023 to 2005 Reply... ... X Introduction to Accounting and Finance Required: 1. Cast yourself in the role of Andrea Accrual and complete the following income statements. 2. Cast yourself in the role of Carlos Cash and complete the following two cash flowe statements. 3. Co-write an executive summary from Andrea and Carlos either in support of or against acquiring the new delivery equipment. (The memo should include a statement as to why they believe using straight-line depreciation is better than using accelerated depreciation from a profitability standpoint.) (Record the amounts in Thousands) Income Statements-Retain Old Delivery Equipment Total 2025 2024 2023 Income before depreciation, s. $1.500 $500 $500 $500 interest, and fuel Depreciation expense Net fuel expense Pretax income 2023 8500 Income Statements-Buy New Delivery Equipment Total 2025 2024 Income before depreciation, $1,600 8500 5500 interest, and fuel Depreciation expense (Gain) loss on the sale of old trucks Interest expense Pretax income Cash Flows-Retain Old Delivery Equipment Total 2025 2024 Net additional operating costs Cash outflow 2023 2023 Cash Flows-Buy New Delivery Equipment Total 2025 2024 Sell old equipment Borrow / repay) cash (Buy) new equipment Sell new equipment (Pay) interest Cash outflow Reply