Chapter 9, Problem 3PA

a)

To determine

Compute depreciation expense for the years 2018 through 2021 under each depreciation method listed as follows.

1. 1. Straight-line, with fractional years rounded to the nearest whole month.
2. 2. 200 percent declining-balance, using the half-year convention.
3. 3. 150 percent declining-balance, using the half-year convention.

Explanation of Solution

Calculate total cost of the shelving:

Cost of shelving	$12,000
Freight charges	520
Sales taxes	780
Installation	2,700
Total cost to be depreciated	$16,000

Table (1)

Total cost of the shelving is $16,000. Expected life is 20 years and no residual value.

1. Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Compute depreciation expense for the years 2018 through 2021 under Straight-line, with fractional years rounded to the nearest whole month:

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2018	($16,000$÷$20) (9$÷$12)	$600	$600	$15,400
2019	$16,000$÷$20	800	1,400	14,600
2020	$16,000$÷$20	800	2,200	13,800
2021	$16,000$÷$20	800	3,000	13,000

Table (2)

Note: In 2018, the shelving are used only for 9 months (April to December)

2. 200 percent declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

$\text{200 percent declining-balance = }\left(\text{Cost of the asset}\right)\times \frac{200\%}{\text{Useful Life}}$

Depreciation rate for 200 percent declining balance method:

$\begin{array}{c}\text{Depreciation rate for 200 percent declining-balance = }\frac{200\%}{\text{Useful Life}}\\ =\frac{200\%}{20\text{years}}\\ =10\%\end{array}$

Compute depreciation expense for the years 2018 through 2021 under the 200 percent declining-balances, using the half-year convention:

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2018	$16,000 $\times$ 10% $\times$(1$÷$2)	$800	$800	$15,200
2019	15,200 $\times$10%	1,520	2,320	13,680
2020	13,680 $\times$ 10%	1,368	3,688	12,312
2021	$12,312 $\times$  10%	1,231	4,919	11,081

Table (3)

3. 150 percent declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

$\text{150\% declining-balance = }\left(\text{Cost }-\text{Accumulated Depreciation}\right)\times \frac{150\%}{\text{Useful Life}}$

Depreciation rate for 150 percent declining balance method:

$\begin{array}{c}\text{Depreciation rate for 150 percent declining-balance = }\frac{150\%}{\text{Useful Life}}\\ =\frac{150\%}{20\text{years}}\\ =7.5\%\end{array}$

Compute depreciation expense for the years 2018 through 2021 under the 150 percent declining-balances, using the half-year convention:

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2018	$16,000$\times$7.5%$\times$(1$÷$2)	$600	$600	$15,400
2019	15,400 $\times$ 7.5%	1,155	1,755	14,245
2020	14,245 $\times$ 7.5%	1,068	2,823	13,177
2021	13,177 $\times$ 7.5%	988	3,811	12,189

Table (4)

b)

To determine

Explain the way that the management can report the highest possible earnings in its financial statements, but it can also minimize its taxable income reported to the IRS.

Explanation of Solution

To report the highest possible earnings the management can use straight line method of depreciation.

To minimize its taxable income reported to the IRS, the management can use declining balances method (MACRS).

c)

To determine

Identify the depreciation method that will result in the lower reported book value at the end of 2021 and identify whether the book value is a fair value of the asset or not. Explain the same.

Explanation of Solution

200 percent declining-balance is the depreciation method that will result in the lower reported book value ($11,081) at the end of 2021.

Depreciation is a process of allocation of cost of the asset, not a process of valuation of the asset’s fair value. Hence, the books value of the shelving is not a fair value of it.

d)

To determine

Record the sale of the old shelving under the following conditions.

1. 1. The shelving was sold for $1,100 cash.
2. 2. The shelving was sold for $175 cash.

Explanation of Solution

1. Record the sale of the old shelving for $1,100 cash.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		1,100
	Accumulated depreciation: Shelving (1)		8,600
	Shelving			9,000
	Gain on disposal of assets			700
	(Record the sale of the old shelving for $1,100 cash)

Table (5)

• Cash (asset account) is increased. Hence it is debited.
• Accumulated depreciation is a contra asset. It is decreased. Hence, it is debited.
• Shelving (asset account) id decreased. Hence, it is credited.
• Gain on disposal of assets (increases the stockholders equity) is increased. Thus, it is credited.

2. Record the sale of the old shelving for $175 cash.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		175
	Accumulated depreciation: Shelving (1)		8,600
	Loss on disposal of asset		225
	Shelving			9,000
	(Record the sale of the old shelving for $175 cash)

Table (5)

• Cash (asset account) is increased. Hence it is debited.
• Accumulated depreciation is a contra asset. It is decreased. Hence, it is debited.
• Loss on disposal of assets (decreases the stockholders equity) is increased. Thus, it is debited.
• Shelving (asset account) id decreased. Hence, it is credited.

Working note:

Calculate the accumulated depreciation of old shelving:

Original cost of the shelving	$9,000
Less: book value	($400)
Accumulated depreciation of old shelving	$8,600

Table (6)