Question

09-2, L09-3, L09.5 son, DDS, purchased new furniture for its store on May 1, 2018. The furniture is expected to have a 10-year life and no residual value. The followin d itures were associated with the purchase. MARLEM 9.3B involving Alternative cution Methods Cost of the furniture .. Freight charges... Sales taxes Installation of furniture. Cost to repair furniture damaged during installation ....... $11,000 375 550 75 400 Instructions . Compute depreciation expense for the years 2018 through 2021 under each depreciation method listed. 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 b. Davidson, DDS, has two conflicting objectives. Management wants to report the highest pos sible earnings in its financial statements, yet it also wants to minimize its taxable income, reported to the IRS. 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 2021? Is book value an estimate of an asset's fair value? Explain. d. Assume that Davidson, DDS, sold the old furniture that was being replaced. The old furniture had originally cost $3.000. Its book value at the time of the sale was $400. Record the sale of the old furniture under the following conditions. 1. The furniture was sold for $780 cash. 2. The furniture was sold for $250 cash.

Answer 1

a	Furniture
	Cost of Furniture	11,000
	Freight charges	375
	Sales Taxes	550
	Installation of Furniture	75
	Total cost to be capitalised	12,000
	Useful Life (Years)	10
	Residual Value	-
	Depreciation Expense for Years	Opening WDV of Asset	Depreciation under Straight Line	Closing WDV of Asset
	2018 (for 8 months)	12,000	800	11,200
	2019	11,200	1,200	10,000
	2020	10,000	1,200	8,800
	2021	8,800	1,200	7,600
	Depreciation Expense for Years	Opening WDV of Asset	200 Percent Declining Balance	Closing WDV of Asset
	2018 (for 8 months)	12,000	1,600	10,400
	2019	10,400	2,080	8,320
	2020	8,320	2,080	6,240
	2021	6,240	2,080	4,160
	Depreciation Expense for Years	Opening WDV of Asset	150 Percent Declining Balance	Closing WDV of Asset
	2018 (for 8 months)	12,000	1,200	10,800
	2019	10,800	2,160	8,640
	2020	8,640	2,160	6,480
	2021	6,480	2,160	4,320
b	The Management can do so by recording depreciation under Straight Line method in the books but recording the depreciation under 200 Percent Declining Balance Method for Income Tax purposes
c	200 Percent Declining Balance resulted in lowest Book Value in the end of 2021. This book value can be an estimate of fair value if the wear and tear of furniture is high due to excessive use.
d	Journal
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
1	Bank A/c	Dr	780
	To Furniture A/c	Cr		400
	To Gain on sale of Furniture A/c			380
	(Being Furniture sold on gain)
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
2	Bank A/c	Dr	250
	Loss on sale of Furniture A/c		150
	To Furniture A/c	Cr		400
	(Being Furniture sold on loss)