Question

SERIAL PROBLEM: KATE'S CARDS (Note: This is a continuation of the Serial Problem: Kate's Cards from Chapters 1 through 8.) SP9. Kate's business is growing faster than she had predicted. In order to keep up, she will need to purchase improved computer hardware. Kate has learned that the software that she uses runs much faster if her computer has a lot of memory. In addition, her files are very large and she is running out of free space on her existing hard drive. Finally, Kate has heard horror stories about hard disk drive crashes and the possibility that all of her work will be destroyed. In order to protect against this possibility, she has decided to invest in a large commercial grade backup system. The cost of the memory and hard disk drive upgrade to Kate's computer will total $420. The cost of the backup system is $3,000. The memory and hard disk upgrade will increase the productivity of Kate's current computer; however, it will not extend its useful life. The backup system is expected to have a five-year useful life. Kate would like to know the following items: 1. How should the expenditure for the memory and hard disk drive upgrade be recorded? Provide the journal entry. Kate's current computer has 42 months remaining for depreciation purposes (under the straight-line method). The original cost of the computer was $4,800 and had a four-year useful life. The current monthly depreciation is $100. How will this current expenditure affect the monthly depreciation? 3. Kate would like to know how depreciation on the backup system under both the straight-line method and the double-declining method differ. She is assigning a $500 salvage value to the equip- ment. Construct a table showing yearly depreciation under both methods.

Answer 1

1. As memory and the hard disk is adding to the productivity of the computer (asset), it will be added to the cost of a computer otherwise debit to repairs and maintenance accounts. Here we are assuming this expense as capital expenditure.

Date	Particulars	Debit($)	Credit($)
	Computer a/c	420
	To cash/bank a/c		420
	(being memory and hard drive upgrade in the computer)

2. Additional depreciation =$10

At the end of 4 years, the salvage value of the computer will be nil.

And thus salvage value for memory and hard disk upgrade will also be nil.

The cost of up-gradation of the computer is $420 and the remaining life is 3.5 years.

Thus depreciation for upgradation will be = (Cost-salvage value)/life =$420/3.5 =$120

Monthly depreciation =$120/12 =$10

Thus there will be addition of $10 in monthly depreciation.

3.

Cost of asset		$3000
Salvage value		$500
Useful life		5	years
Double declining balance rate	33.34%
	Straight line($)	DDB($)
Year 1	500	1000
Year 2	500	667
Year 3	500	444
Year 4	500	296
Year 5	500	197
Total	$2500	$2605