Problem 9.3A Smart Hardware purchased new shelving for its store on 1 April 2013

ID: 2564335 • Letter: P

Question

Problem 9.3A Smart Hardware purchased new shelving for its store on 1 April 2013. The shelving is expected to have model as its accounting policy in subsequently following expenditures were associated with the purchase: a 20-year life and no residual value . Smart Hardware adopts the cost measuring its property, plant, and equipment. The Cost of the shelving... $120,000 5,200 7,800 27,000 4,000 Installation of shelving . Cost to repair shelf damaged during installation . .. Instructions Compute depreciation expense for the years 2013 through 2016 under each depreciation method listed below 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. Smart Hardware has two conflicting objectives. Management wants to report the high sible earnings in its financial statements, yet it also wants reported to the tax authority. Explain how both of these objectives can be met. a. est pos- b. to minimize its taxable income

Explanation / Answer

a. Costs to be depreciated include:

Cost of shelving

$12,000

Freight charges

$5,200

Sales taxes

7,800

Installation

27,000

Total costs to be depreciated

52,000

(1) Straight line schedule

Year Computation Depreciation expense Accumulated depreciation Book value

2013 52,000 x 1/20 x 9/12 1,950 1,950 50,050

2014 52,000 x 1/20 2,600 4,550 47,450

2015 52,000 x 1/20 2,600 7,150 44,850

2016 52,000 x 1/20 2,600 9,750 42,250

(2) 200% declining balance

Year

Computation

Depreciation expense

Accumulated depreciation

Book value

2013

52,000 x 10% x 1/2

2600

49400

2014

49,400 x 10%

4940

7540

44460

2015

44,460 x 10%

4446

11986

40014

2016

40,014 x 10%

4001.4

15987.4

36012.6

(3) 150% declining balance

Year

Computation

Depreciation expense

Accumulated depreciation

Book value

2013

52,000 x 7.5% x 1/2

1950.00

50050.00

2014

50,050 x 7.5%

3753.75

5703.75

46296.25

2015

46,296.25 x 7.5%

3472.22

9175.97

42824.03

2016

42,677.78 x 7.5%

3211.80

12387.77

39612.23

b. Smart may use straight line method to achieve the least depreciation amount in early years of shelving useful life. In the federal tax return, Smart may use an accelerated method known as MACRS. The use of MACRS will decrease income in early years of the shelving useful life. Hence, management goals are really not in conflict.

c. The 200% declining balance method results in lowest book value at 36,012.6. Depreciation is not a valuation process. Hence, 36,012.6 book value is not an estimate of shelving fair value at the end of 2016.

1. Cash ………………………………………………………….12,000

Accumulated depreciation: Shelving …………….86,000

Shelving ………………………………………………………….90,000

Gain on disposal of assets ………………………………. 8,000

2. Cash ……………………………………………………………2,000

Accumulated depreciation: Shelving ………….........….86,000

Loss on sale of asset ……………………………………. 2000