Exercise 7-56 (Algorithmic) Expenditures after Acquisition and Depreciation Nati
ID: 341096 • Letter: E
Question
Exercise 7-56 (Algorithmic) Expenditures after Acquisition and Depreciation National Bank installed a wireless encryption device in January 2014. The device cost $120,000. At the time the device was installed, National Bank estimated that it would have an estimated lif of 8 years and an estimated residual value of $10,000. By 2017, the bank's business had expanded and modifications to the device were necessary. At the beginning of 2018, National Bank spent $45,000 on modifications for the device. National Bank estimates that the new estimated life of the device (from January 2018) is 6 years and the new residual value is $4,880 National Bank uses the straight-line method of depreciation. Had National Bank not modified the device, it estimates that processing delays would have caused the bank to lose at least $100,000 of business per year Required: 1. Compute the accumulated depreciation for the device at the time the modifications were mad (4 years after acquisition) 2. What is the book value of the device before and after the modification? Book value odification $1 10,000 X Device after modification 3. What will be annual straight-line depreciation expense for the device after the modification?Explanation / Answer
1) Annual depreciation of the device = (Cost - Residual Value)/Useful Life
= ($120,000 - $10,000)/8 yrs = $110,000/8 yrs
= $13,750
Depreciation for four year from 2014 to 2017 = $13,750*4 yrs = $55,000
Therefore the accumulated depreciation for the device at the time the modificationa was made is $55,000.
2) Book Value of Device before modification = Cost - Accumulated Depreciation
= $120,000 - $55,000 = $65,000
Book Value of Device after modification = Book Value before modification+Modification cost
= $65,000+$45,000 = $110,000
3) Annual Straight line depreciation after the modification
= (Book Value after Modification - Revised residual Value)/New estimated life
= ($110,000 - $4,880)/6 yrs = $17,520
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