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Smart Hardware Depreciation and Print Technologies Asset

Must be done in excel, the Excel Template 9.3A is attached for the problem.

Case 9.1

Mickey Gillespie is the controller of Print Technologies, a publicly owned company. The company is experiencing financial difficulties and is aggressively looking for ways to cut costs. Susan Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life used in computing depreciation on certain special purpose machinery. Bedell believes that this change represents a substantial cost savings, as it will reduce the depreciation expense on these assets by nearly one half.

Note: the proposed change affects only the deprecation expense recognized in financial statements. Depreciation deductions in income tax returns will not be affected.

Instructions:

A. Discuss the extent to which Bedell's idea will, in fact achieve a cost savings. Consider the effects on both net income and cash flows.

B. Who is responsible for estimating the useful lives of plant assets?

C. Discuss any ethical issues that Gillespie should consider with respect to Bedell's instructions.

Problem 9.3A

Smart Hardware purchased new shelving for its store on April 1, 2009. The shelving is expected to have a 20 year life and no residual value. The following expenditures were associated with the purchase:

Cost of the Shelving $12,000
Freight charges $520
Sales tax $780
Installation of shelving $2,700
Cost of repair shelf damaged during installation $400

Instructions:

A. Compute depreciation expense for the years 2009 through 2012 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

B. Smart Hardware has two conflicting objectives. Management wants to report the highest possible earning 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 result in the lowest reported book value at the end of 2012? Is book value an estimate of an asset's fair value? Explain.

D. Assume that Smart 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 1,200 cash
2. The shelving was sold for 200 cash.

Note: Depreciation Expense, 12/31/2010 = $1,155 (150% declining-balance)
Part A (2) year 2012 book value = $11,081

Attachments

Solution Preview

See attached Excel file.

Case 9.1
A. Discuss the extent to which Bedell's idea will, in fact achieve a cost savings. Consider the effects on both net income and cash flows.

Increasing the depreciation period would result in a lower depreciation expense per year and so would increase the reported net income. There would be no cost savings as such since depreciation is only an allocation of the cost of the asset. There is no impact on the cash flows since the cash paid for assets is already gone out. Therefore changing the period would show a higher net income by reducing the depreciation expense but would have no effect on the cash flows.

B. Who is responsible for estimating the useful lives of plant assets?

The estimate for the useful life of plant assets is at the discretion of the management. In this case Susan Bedell being the CEO would have the authority to determine the useful ...

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