Question

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 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 had 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? Provided the journal entry.
2. Kate's current computer has 42 months remaining for depreciation purpose (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 equipment. Construct a table showing yearly depreciation under both methods

Answer 1

Dear Student,

Please write in case of any clarification is required.

How should the expenditure for the memory and hard disk drive upgrade be recorded? Provided the journal entry.
Answer
As the Cost of memory and hard disk drive upgrade will increase the productivity of Kate's current computer. So it will be treated as Capital Expenditure.
Journal Entry
	Dr USD	Cr USD
Computer A/c………………Dr	420
To Cash A/c		420

Question>>Kate's current computer has 42 months remaining for depreciation purpose (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?

Answer:

The cost of Memory and Hard drive is treated as Capital Expenditure, hence it would be depreciated over the time of 42 month ( which is the remaining life of the computer)

The depreciation on USD 420 is calculated as = $ 420/42 months= $ 10 per month. So the total depreciation of the computer would be $ 100+ $ 10= $110.

Question> 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 equipment. Construct a table showing yearly depreciation under both methods.

Answer
Table Showing the yearly Depreciation on Backup System under straight-line method (SLM) and the double-declining method, Salvage value is $ 500.
Depreciation under SLM	Depreciation under double-declining method
Rate of Depreciation @16.67% per annum	Rate of Depreciation @33.33% per annum; { 16.67 X 2}
$500	$1,000

Particulars	USD
Cost of Back up System	3000
Less Salvage Value	500
Cost to be depreciated (A)	2500
Expected Life of Back up System in years (B)	5
Depreciation as per SLM ( C=A/B)	500
Rate of Depreciation (C/A)*100	16.6667
{Amount of Depreciation/Actual Cost}*100