ACC 1010 Module 5 Long-Term Assets and Equity Homework Example

Delaware River Music, Inc.: A Delivery Van, an Installment Note and a New Investor, September to December 2026

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-1010: Principles of Financial Accounting

Mentor Name

Month Day, Year

Delaware River Music, Inc.: A Delivery Van, an Installment Note and a New Investor, September to December 2026

By late summer, Delaware River Music, Inc., the invented music retailer whose books these ACC-1010 samples follow, was delivering rental instruments to five school districts in a borrowed pickup truck. On September 1, 2026, it bought a used cargo van. This homework records the purchase, compares three depreciation methods for the van, amortizes the installment note that financed it, shows how the note is classified on the December 31 balance sheet and records the store's sale of new common stock to a second investor in October.

Part A: Acquiring the Van

The van cost $39,500. The store also paid $1,700 to install shelving and instrument racks, $480 for title and registration and $320 for the first year's insurance. Following the cost principle explained in the course textbook (Williams et al., 2023), the van's cost includes every amount needed to get it ready for its intended use: the purchase price, shelving and title, a total of $41,700. Insurance is not part of the cost, because it covers a future period of use rather than preparing the asset; it sits in a prepaid account and is charged to expense one month at a time. The store paid $11,700 in cash and signed a $30,000 four-year installment note at 7% annual interest.

Part B: Comparing Depreciation Methods

The owners expect to use the van for five years and sell it for about $5,700, so its depreciable base is $36,000. They also expect it to be driven about 120,000 miles over that time. The table compares the first full year of depreciation under three methods.

Each method spreads the same total cost over the van's life but in a different pattern. Straight-line charges the same amount every year. Double-declining-balance charges much more in the early years, which suits assets that lose value or usefulness quickly; it ignores residual value in the calculation but stops when book value reaches $5,700. Units of production ties the charge to actual use, which fits a delivery van well, because heavy delivery months wear it more. For September through December 2026, the store records four months of straight-line depreciation, $2,400, its chosen method for vehicles because it is simple and use is expected to be fairly even across the school year.

The choice is not trivial. Keating and Zimmerman (1999) studied why companies change depreciation policies and found that tax law changes, investment in new assets and incentives tied to reported earnings all played a part. For tax purposes the store will follow the federal depreciation rules described by the Internal Revenue Service (2025), which may allow faster deductions than its book method; the difference between book and tax depreciation is common and is tracked separately.

Part C: Amortizing the Installment Note

The note requires 48 monthly payments of $718.39, beginning September 30. Each payment covers the interest for the month on the unpaid balance, with the rest reducing principal.

Each payment is recorded with a debit to interest expense, a debit to notes payable and a credit to cash; the September 30 entry, for example, debits interest expense $175.00 and notes payable $543.39 and credits cash $718.39. Interest falls and principal rises each month because interest is charged on a shrinking balance. On the December 31 balance sheet, the $27,807.35 balance is split by when principal is due. The principal in the next twelve payments, January through December 2027, totals $6,892.50 and belongs among current liabilities as debt due within the year; the remaining $20,914.85 is long-term. The split tells the bank how much cash the store must find in the coming year to service the van loan.

Part D: Issuing Common Stock

On October 15, a local music teacher invested $20,000 in exchange for 2,000 shares of the store's $1 par value common stock. The entry debits cash $20,000, credits common stock $2,000 for the par value and credits additional paid-in capital $18,000 for the amount above par. Par value is a legal amount with no relation to market value, which is why most of the investment is recorded as paid-in capital. The new investor's money strengthens the balance sheet before the store's slow winter months, and unlike the van note it carries no required payments; the cost is that the original owners now share future profits and votes with a third shareholder.

References

Internal Revenue Service. (2025). How to depreciate property (Publication 946). U.S. Department of the Treasury.

Keating, A. S., & Zimmerman, J. L. (1999). Depreciation-policy changes: Tax, earnings management, and investment opportunity incentives. Journal of Accounting and Economics, 28(3), 359-389. https://doi.org/10.1016/S0165-4101(00)00004-5

Williams, J. R., Bettner, M. S., & Smith, K. R. (2023). Financial & managerial accounting: The basis for business decisions (20th ed.). McGraw-Hill Education.