Conservative Company purchased a warehouse on January 1, 2006, for $400,000. At the time of purchase, Conservative anticipated that the warehouse would be used to facilitate the expansion of its product lines. The warehouse is being depreciated over 20 years and is expected to have a residual value of $50,000. At the beginning of 2011, the company decided that the warehouse would no longer be used and should be sold for its book value. At the end of 2011, the warehouse still had not been sold and its net realizable value was estimated to be only $260,000.
Required:
a. Calculate the book value of the warehouse on January 1, 2011.
b. Prepare all the journal entries that Conservative should make during 2011 related to the warehouse.
c. If Conservative sells the warehouse in 2012 for $220,000, what entry would be made for the sale?
d. During 2011, the financial vice-president expressed concern that if Conservative put the building up for sale the company might have to report a loss, and he did not want to reduce 2011 earnings. He wanted to continue treating the warehouse as an operating asset. How would the 2011 and 2012 financial statements be different if the warehouse were still treated as an operating asset during 2011? From a shareholder's perspective, do you think the treatment makes any difference? Explain.