Question

Kate's Cards. Serial Problem 9.

I've already figured out part one. Could I get help with parts two and three please? I've seen many different examples and none of them are making sense.

SERIAL PROBLEM: KATE'S CARDS Kate's Cards (Note: This is a continuation of the Serial Problem: Kate's Cards from Chapters / 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. 2. 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

Question 1: Any major expenditure that enhances a fixed asset to such an extent that same would qualify for being recorded as improvement or betterment of asset, then it should be called Capital Improvement

To be qualified as an improvement such expenditure shall extend life of asset or enhance overall value of asset or adapt the asset in such a manner that it can be used in new way.

In this case, Memory and Hard disk drives are being replaced with new better hardware. Though it will not increase useful life of computer, same shall definitely increase value of asset and improve working capacity of computer. Regular repair and maintenance which are recorded as expenses keep asset in it’s original form and in this case there will be a working capacity addition along with value.

Hence, following Journal entry shall be passed:

Debit 420 Credit $ Date Particulars 1 Computer Cash/Accounts Payable (Memory and hard drive upgraded.) $ 420

Question 2: With upgrade of Memory and Hard drive, Monthly Depreciation for computer shall increase by $10 from current monthly depreciation of $100 to $110.

Particulars Amount Historical Value of Computer $ 4,800 Less: Depreciation for 6 months $ 600 Book Value as of Today $ 4,200 Add: Improvement in Computer by replacing Memory and Hard Drive $ 420 Book Value after Improvement $ 4,620 Remaining usefull life of Computer 42 Months Monthly Depreciation for 42 months $ 110

Question 3: Depreciation for Backup System to be worked using two methods.

First Method: Straight Line Method (SLM)

Depreciation under SLM = Cost of Asset - Salvage Value Useful life of Asset $3000-$500 5 Year $500

Second Method: Double Decline Method (DDM)

Depreciation under DDM = 2 X Rate of Depreciation in SLM X Book Value at begining of year Rate of Depreciation in SLM = 100%/5 Years = 20%

Calculation of Depreciation as per Double Decline method would be as follow:

1 Depreciation as per Year Book Value Closing Value DDM (2 X 20% X BV) 3,000 $ 1,200 $ 1,800 2 1,800 $ 720 $ 1,080 | $ 1,080$ 432 $ 648 648 $ 259 $ 389 1$

Comparison of Depreciation under both method is as follow:

Year Depreciation as Depreciation as per Difference per SLM DDM 500$ 1,200 $ (700) 500 $ 720$ (220) 500 $ 432 $ 68 500 $ 259 $ 241 $ 500$ 500 $ 5

Depreciation under DDM would be slightly more as it will be charged till 4^th year when asset will reach it’s salvage value.