Chapter 9, Problem 3PB

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 the total cost of the furniture:

Cost of furniture	$11,000
Freight charges	375
Sales taxes	550
Installation charges	75
Total cost to be depreciated	$12,000

Table (1)

The total cost of the furniture is $12,000. Expected life is 10 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	($16,000$÷$10) (8$÷$12)	$800	$800	$11,200
2019	$16,000$÷$10	1,200	2,000	10,000
2020	$16,000$÷$10	1,200	3,200	8,800
2021	$16,000$÷$10	1,200	4,400	7,600

Table (2)

Note: In 2018, the furniture are used only for 8 months (May 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:

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

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	$12,000 $\times$ 20% $\times$(1$÷$2)	$1,200	$1,200	$10,800
2019	10,800$\times$20%	2,160	3,360	8,640
2020	8,640$\times$ 20%	1,728	5,088	6,912
2021	$6,912$\times$ 20%	1,382	6,470	5,530

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:

$\begin{array}{c}\text{Depreciation rate for 150 percent declining-balance = }\frac{150\%}{\text{Useful Life}}\\ =\frac{150\%}{10\text{years}}\\ =15\%\end{array}$

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	$12,000$\times$15%$\times$(1$÷$2)	$900	$900	$11,100
2019	11,100$\times$ 15%	1,665	2,565	9,435
2020	9,435$\times$ 15%	1,415	3,980	8,020
2021	8,020$\times$ 15%	1,203	5,183	6,817

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).

By following the above methods, management will achieve its both objectives without any conflict.

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 ($5,530) 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 furniture is not a fair value of it.

d)

To determine

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

1. 1. The furniture was sold for $780 cash.
2. 2. The furniture was sold for $250 cash.

Explanation of Solution

1. Record the sale of the old furniture for $780 cash.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		780
	Accumulated depreciation: Furniture (1)		2,600
	Furniture			3,000
	Gain on disposal of assets			380
	(Record the sale of the old furniture for $780 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.
• Furniture (asset account) is 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 furniture for $250 cash.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		250
	Accumulated depreciation: Furniture (1)		2,600
	Loss on disposal of asset		150
	Furniture			3,000
	(Record the sale of the old furniture for $250 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.
• Furniture (asset account) is decreased. Hence, it is credited.

Working note:

Calculate the accumulated depreciation of old furniture:

Original cost of the furniture	$3,000
Less: book value	($400)
Accumulated depreciation of old furniture	$2,600

Table (6)