Sals Salon purchased new furniture and fixture for its store on April 1, 2001. The furniture and fixture is expected to have a 10-year life and no residual value. The following expenditures were associated with the purchase:

Cost of the furniture and fixture $10,000

Freight charges 350

Sales taxes 600

Installation of furniture and fixture 50

Cost to repair F & F damaged during installation 500

Instructions

a. Compute depreciation expense for the years 2001 through 2004 under each depreciation method listed below:

1. Straight-line, with fractional years rounded to the nearest whole month.

2. 200% declining-balance, using the half-year convention.

b. Sals 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 FBR. 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 2004? Is book value an estimate of an assets fair market value? Explain.

d. Assume that Sals Salon sold the old furniture that was being replaced. The old furniture and fixture had originally cost $6,000. Its book value at the time of the sale was $500. Record the sale of the old furniture and fixture under the following conditions:

1. The furniture and fixture was sold for $900 cash.

2. The furniture and fixture was sold for $200 cash.