Now that she is selling mixers and her customers can use credit cards to pay for...

Now that she is selling mixers and her customers can use credit cards to pay for them, Natalie is thinking of upgrading her website to include the online sale of mixers and payment by credit card. This would enable her to sell these mixers to a wider range of customers using the Internet. Natalie contacts her brother who originally prepared the website for her. He agrees to upgrade the site so it can handle credit card security issues as well as direct order entry. The cost of the upgrade is $1,800. This cost would be incurred and paid for during the month of August 2018, and the upgrade would be operational September 1, 2018. Recall that Natalie’s website had an original cost of $600 and is being amortized using the straight- line method over 24 months, starting December 1, 2017, with zero residual value. Additional costs for website maintenance and insurance are estimated to be $1,200 per year. If Natalie decides to upgrade the website, its useful life will not change and there will be no change in residual value. Instructions:

(a) Prepare the journal entry to record the upgrade.

(b) Calculate the monthly amortization expense before the upgrade and the accumulated amortization and book value on August 31, 2018.

(d) Calculate the accumulated amortization and book value on December 31, 2018.

(e) Explain to Natalie the difference in accounting for the website upgrade costs and accounting for the costs incurred for website maintenance and insurance. In your explanation, comment on the generally accepted accounting principles that affect the accounting for these transactions.

Solutions

Expert Solution

(a)	Prepare the journal entry to record the upgrade
Date	General Description	Debit	credit
31-Aug-18	Intangible Asset- website	1800
	Cash		1800
	Amount paid for up gradation of website

(b)	Calculate Monthly Amortization expense before the upgrade and the accumulated amortization
	Particulars	$
	Original website Value	$600
	Life of the website	24 months
	Amortization per month	$600/24
	Accumulated Amortization	$225
	(25*9)
	Book value on 31 08 2018	$375		l
	($600-$375)

C)	Calculation of revised monthly expenses for sept 1 2018
	Particulars	$
	New Value on 01 sep 2018
	($1800+$375)	$2,175
	Amortization Per Month
	$2175/15	$145

(d)	Calculate the accumulated amortization and book value as on December 31 2018
	Particulars	$
	Accumulated depreciation
	[$580+$225]	$805

	Book Value
	[$2175-$805]	$1,370

(e) costs incurred for up gradation of website would be considered as an “ Additional improvement cost” . Credit card payments would able to process, if the website is updated and it would not increase the asset efficiency, it is only the improvement cost. As per GAAP, Any cost incurred for improving useful life of the asset or improvement of the asset, those cost should be debited to cost of the asset.

And on other side, Maintenance of website and insurance cost would be as considered as ordinary costs. Those costs should be debited to expense account

ekkarill92 answered 8 months ago

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