Zeff Company purchases a delivery van on January 1, 20X1, at a cost of $15,849. It has a useful life of four years and no estimated salvage value. When making the purchase decision, the company anticipated that the use of the van would generate a revenue (cash) inflow of $5,000 each year, assumed to occur at the end of the year. The discount rate that equates the purchase price to the expected cash inflows is 10%. Assume that depreciation is the company’s only expense for the year.
Required:
1. Using straight-line depreciation, do the following for each of the four years:
a. Compute accumulated depreciation and the net book value of the van.
b. Prepare Zeff’s income statement assuming that the $5,000 expected inflows occur.
c. Compute the return on beginning net fixed assets.
2. Repeat requirements 1.a. through 1.c. using the discounted present value method of depreciation.
3. Which depreciation method provides the most useful information?
4. Why do you think that GAAP does not permit the discounted present value method of depreciation?
