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

Explanation of Solution
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:
Compute depreciation expense for the years 2015 through 2018 under straight-line, with fractional years rounded to the nearest whole month.
Step 1: Calculate the acquisition cost of the furniture.
Particulars | Amount ($) |
Cost of furniture | $11,000 |
Freight charges | 375 |
Sales taxes | 550 |
Installation charges | 75 |
Total cost to be depreciated | $12,000 |
Table (1)
Step 2: Compute depreciation expense for the years 2015 through 2018 under straight-line, with fractional years rounded to the nearest whole month.
Year | Computation | Depreciation Expense |
Book Value | |
2015 | ($16,000 | $800 | $800 | $11,200 |
2016 | $16,000 | 1,200 | 2,000 | 10,000 |
2017 | $16,000 | 1,200 | 3,200 | 8,800 |
2018 | $16,000 | 1,200 | 4,400 | 7,600 |
Table (2)
Note: In 2015, 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.
Formula:
Compute depreciation expense for the years 2015 through 2018 under the 200 percent declining-balances, using the half-year convention.
Step 1: Compute depreciation rate for 200 percent declining balance method.
Step 2: Compute depreciation expense for the years 2015 through 2018 under the 200 percent declining-balances, using the half-year convention.
Year | Computation | Depreciation Expense |
Accumulated Depreciation |
Book Value |
2015 | $12,000 | $1,200 | $1,200 | $10,800 |
2016 | 10,800 | 2,160 | 3,360 | 8,640 |
2017 | 8,640 | 1,728 | 5,088 | 6,912 |
2018 | $6,912 | 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.
Formula:
Compute depreciation expense for the years 2015 through 2018 under the 150 percent declining-balances, using the half-year convention.
Step 1: Calculate depreciation rate for 150 percent declining balance method.
Step 2: Compute depreciation expense for the years 2015 through 2018 under the 150 percent declining-balances, using the half-year convention.
Year | Computation | Depreciation Expense |
Accumulated Depreciation |
Book Value |
2015 | $12,000 | $900 | $900 | $11,100 |
2016 | 11,100 | 1,665 | 2,565 | 9,435 |
2017 | 9,435 | 1,415 | 3,980 | 8,020 |
2018 | 8,020 | 1,203 | 5,183 | 6,817 |
Table (4)
b)
Explain the way the management could report the highest possible earnings in its financial statements, and can minimize its taxable income reported to the IRS as well.
b)

Explanation of Solution
To report the highest possible earnings the management can use
To minimize its taxable income reported to the IRS, the management can use accelerated depreciation methods like MACRS (Modified Accelerated Cost Recovery System).
By following the above methods, management will achieve its both objectives without any conflict.
c)
Identify the depreciation method that will result in the lower reported book value at the end of 2018, and explain whether the book value is a fair value of the asset or not.
c)

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 2018.
Depreciation is a process of allocation of cost of the asset, not a process of valuation of the asset’s fair value. Hence, the book value of the furniture is not the fair value of it.
d)
Journalize the sale of the old shelving under the following conditions:
- 1. The furniture was sold for $780 cash.
- 2. The furniture was sold for $250 cash.
d)

Explanation of Solution
1.
Journalize the sale of the old furniture for $780 cash.
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Cash | 780 | |||
Accumulated depreciation: Furniture | 2,600 | |||
Furniture | 3,000 | |||
Gain on disposal of assets | 380 | |||
(Record the sale of the old furniture for $780 cash) |
Table (5)
Description:
- 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.
Journalize the sale of the old furniture for $250 cash.
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Cash | 250 | |||
Accumulated depreciation: Furniture | 2,600 | |||
Loss on disposal of asset | 150 | |||
Furniture | 3,000 | |||
(Record the sale of the old furniture for $250 cash) |
Table (5)
Description:
- 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)
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