After meeting with Software Solutions, as described in Chapter 8, Emily was able to negotiate a continuation of existing credit terms of 30 days and decided to take on the additional work offered by Software Solutions. In order to better handle this work, ABC decided to upgrade its computer equipment and hire two additional employees. After some research and much discussion, the computer upgrades and costs were determined to be as follows:
1. Old server will be retired and donated to the community centre. It was originally purchased for $15,000 on January 3, 2014. It is being depreciated on a straight-line basis over a five-year useful life with no residual value.
2. Purchase of a new server, including installation, $25,000.
3. Purchase of computing equipment for the new employees at a cost of $4,500.
4. Purchase of additional yearly software usage licences for the two new employees at a cost of $1,000 each.
5. Purchase of additional office furniture at a cost of $2,500, plus delivery and shipping costs of $500.
6. Additional insurance is required, $1,000 per year.
7. Rearranging the office space and repainting the office to "freshen things up" at a cost of $2,850.
Doug, Bev, and Emily anticipate that the cost of the upgrade can be financed with cash the company currently has in the bank. The upgrades will take place between Christmas and New Year's when the sales at the business are a little slower. If all goes smoothly, the new equipment will be installed and ready for use by January 2, 2018.
Emily is concerned about how to record these transactions in the accounting records. She is not certain which costs should be capitalized and which should be expensed.
Instructions
(a) Identify which of the above costs should be capitalized and which should be expensed.
(b) Prepare the journal entry(ies) to record the retirement of the old server (item 1) on January 2, 2018, for no proceeds. The last time depreciation was recorded was on June 30, 2017.
(c) Prepare the journal entry(ies), if any, required to record items 2 through 7 above. Assume all transactions are cash transactions and occurred on January 2, 2018.