Eastern National Bank installed a wireless encryption device in January 2007. The device cost $180,000. At the time the device was installed, Eastern estimated that it would have an expected life of eight years and a residual value of $10,000. By 2010, the bank’s business had expanded and modifications to the device were necessary. At the beginning of 2011, Eastern spent $45,000 on modifications for the device. Eastern estimates that the new expected life of the device (from January 2011) is six years and the new residual value is $5,000. Eastern uses the straight-line method of depreciation. Had Eastern not modified the device, it estimates that processing delays would have caused the bank to lose at least $100,000 of business per year.
1. Compute the accumulated depreciation for the device at the time the modifications were made (four years after acquisition).
2. What is the book value of the device before and after the modification?
3. What will be annual straight-line depreciation expense for the device after the modification?
4. Conceptual Connection: The bank’s president notes, “Since the after-modification, depreciation expense exceeds the before-modification depreciation expense. This modification was a poor idea.” Comment on the president’s assertion.