Issues Involving Alternative Depreciation MethodsHills Hardware purchased new shelving for...

Issues Involving Alternative Depreciation Methods

Hills Hardware purchased new shelving for its store on April 1, 2015. The shelving is expected to have a 20-year life and no residual value. The following expenditures were associated with the purchase:

Instructions

a. Compute depreciation expense for the years 2015 through 2018 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.

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b. Hills Hardware 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 IRS. Explain how both of these objectives can be met.

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c. Which of the depreciation methods applied in part a will result in the lowest reported book value at the end of 2018? Is book value an estimate of an asset’s fair value? Explain.

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d. Assume that Hills Hardware sold the old shelving that was being replaced. The old shelving had originally cost $9,000. Its book value at the time of the sale was $400. Record the sale of the old shelving under the following conditions:

1. The shelving was sold for $1,100 cash.

2. The shelving was sold for $175 cash.