Where the Dough Goes . . .

No matter how harried Stan Hernandez feels as the owner of his own Subway restaurant, the aroma of his fresh-baked gourmet breads always perks him up. However, the sales generated by Subways line of gourmet-seasoned breads perks Stan up even more.

Subway restaurants introduced freshly baked bread in 1983, a practice that made it stand out from other fast-food chains and helped build its reputation for made-to-order freshness. Since then Subway franchisees have introduced many types of gourmet seasoned breadssuch as hearty Italian or Monterey cheddaraccording to a schedule determined by headquarters.

Stan was one month into the limited-time promotion for the chains new roasted garlic seasoned bread when his bake oven started faltering. The temperature controls just dont seem quite right, said his employee and sandwich artist, Rashid. Its taking incrementally longer to bake the bread.

This couldnt happen at a worse time, moaned Stan. Were baking enough roasted garlic bread to keep a whole town of vampires away, but if we dont get it out of the oven fast enough, well keep our customers away!

That very day Stan called his field consultant, Mariah, to discuss what to do about his bake oven. Mariah reminded Stan that his oven trouble illustrated the flip side of buying an existing store from a retired franchisee having to repair or replace worn or old equipment. After receiving a rather expensive repair estimate and considering the age of the oven, Stan ultimately decided it would make sense for him to purchase a new one. Mariah concurred, At the rate your sales are going, Stan, youre going to need that roomier new model.

Wow, do you realize how much this new bake oven is going to cost me? $3,000! Stan exclaimed while meeting with his cousin-turned-Subway-accountant, Lila Hernandez. Yes, its a lot to lay out, Stan, said Lila, but youll be depreciating the cost over a period of 10 years, which will help you at tax time. Lets do the adjustment on your worksheet, so you can see it.

The two of them were sitting in Stans small office behind the Subway kitchen, and they pulled up this months worksheet on Stans Peachtree program. Lila laughed, Im sure glad you started entering your worksheets on Peachtree again! The figures on those old ones were so doodled over and crossed out that I could barely decipher them! We may need your worksheets at tax time.

Anything for you, Stan said. I may depreciate my bake oven, but my gratitude for your accounting skills only appreciates with time!

Question

Answer the following: How do you think Lila got the information on the useful life of Stans bake oven and the estimate for its residual value? Why do you think she gets her information from this particular source? If Stan uses a straight-line method of depreciation and Stans bake oven has a residual value of $1,000, how much depreciation will he account for each year and what would the adjustment be for each month?

Explain since good accounting practices and data makes it possible for business owners to make informed choices, such as whether or not it makes sense to purchase a new bigger oven over repairing the smaller old one, why is it that so many business seem to make poor business choices?