Brad Jolie recently decided to open a restaurant specializing in New Orleans cuisine. He purchased a restaurant building on January 2, 2009, at a cost of $650,000, paying 10 percent of the purchase price in cash and signing a note for the balance. The building has an estimated useful life of 25 years and an estimated salvage value of $150,000. Also on January 2, 2009, Jolie paid cash of $80,000 for used kitchen equipment with an estimated four-year useful life and $8,000 salvage value.
Required:
(a) Prepare the journal entries to record the purchase of the building and the kitchen equipment.
(b) Compute depreciation expense for 2009 and 2010 on the restaurant using the following methods:
(1) Straight-line
(2) Double-declining-balance
(c) Prepare the year-end adjusting journal entries to record the depreciation expense amounts computed in part (a).
(d) Compute depreciation expense on the kitchen equipment for year 2009 through 2012, assuming that the following depreciation methods are used:
(1) Straight-line
(2) Double-declining-balance
(e) Suppose that Jolie believes that the double-declining-balance method most accurately reflects the true depreciation pattern of his firm’s depreciable assets. Would it be unethical for the owner to apply the straight-line depreciation method to these assets? Why or why not?
(f) Provide at least two positive and negative financial implications of buying used kitchen equipment.