Reference no: EM132539877

Question - Issues Involving Alternative Depreciation Methods

Salon purchased new furniture for its store on January 1, 2011. The furniture is expected to have a 10-year life and no residual value. The following expenditures were associated with the purchase:

Cost of the furniture $10,000

Freight charges 350

Sales taxes 600

Installation of furniture 50

Cost to repair furniture damaged during installation 500

Instructions -

a) Compute depreciation expense for the years 2011 through 2014 under each depreciation method listed below:

1) Straight-line;

2) 200% declining-balance.

b) Sal's Salon has two conflicting objectives. Management wants to report the highest possible earnings in its financial statements, yet it also wants to minimize its taxable income reported to the tax bureau. Explain how both of these objectives can be met.

c) Which of the depreciation methods applied in part a resulted in the lowest reported book value at the end of 2014? Is book value an estimate of an asset's fair market value? Explain.

d) Assume that Sal's Salon sold the old furniture that was being replaced. The old furniture had originally cost $6,000. Its book value at the time of the sale was $500. Record the sale of the old furniture (making accounting entries) under the following conditions:

1) The furniture was sold for $900 cash.

2) The furniture was sold for $200 cash.