Continuing Cookie Chronicle

(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 8.)
CCC9
Part 1 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 $1,500. This cost would be incurred and paid for during the
month of August 2010, and the upgrade would be operational September 1, 2010. Recall
that Natalie's website had an original cost of $600 and is being amortized using the straightline
method over 24 months, starting December 1, 2009, 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, 2010.
(c) Calculate the revised monthly amortization expense as of September 1, 2010.
(d) Calculate the accumulated amortization and book value on December 31, 2010.
(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.
Part 2 Natalie is also thinking of buying a van that will be used only for business.
The cost of the van is estimated at $35,500. Natalie would spend an additional $2,500
to have the van painted. In addition, she wants the back seat of the van removed so
that she will have lots of room to transport her mixer inventory as well as her baking
supplies. The cost of taking out the back seat and installing shelving units is estimated
at $1,500. She expects the van to last her about 5 years, and she expects to drive it for
100,000 miles. The annual cost of vehicle insurance will be $2,400. Natalie estimates
that at the end of the 5-year useful life the van will sell for $6,500. Assume that she
will buy the van on August 15, 2010, and it will be ready for use on September 1, 2010.
Natalie is concerned about the impact of the van's cost on her income statement and
balance sheet. She has come to you for advice on calculating the van's depreciation.
Instructions
(a) Determine the cost of the van.
(b) Prepare a depreciation table for straight-line depreciation (similar to the one in
Illustration 9-9). Recall that Cookie Creations has a December 31 fiscal year-end.
(c) What method should Natalie use for tax purposes? Provide a justification for your choice.
Is she required to use the same approach for financial reporting and tax reporting?
This is what I need to fill in
CCC9 CONTINUING COOKIE CHRONICLE
Look for the ? and fill-in the missing information.
54 Total Points
Part 1

(a) Aug. 31 Website .................................................... 1500

Cash................................................... 1500
(b) Monthly amortization
600 24 months = $25
Accumulated amortization August 31, 2010
9 months X $25 = $225
Book value at August 31, 2010 = 1875
($600 + $1500 $225)
(c) Revised monthly amortization
Original cost.............................................................. $ 600
Less: Accumulated amortization.............. ............
225
Plus: Additional cost .................................. .............. 1500
Amortizable cost ........................................................ 1875
# of months remaining (24 9)...................... ...... .. 15
Revised monthly amortization................................ $ 125
(d) Cost ($600 + $1500) ......................................... .......... $2100
Accumulated amortization:......................................
Calculated in (b) ..............................$225
4 months X $125?................................... 500
725
Book value............................................................. $1,375
Part 1 (Continued)
(e) Costs incurred for website maintenance and insurance are costs
incurred to maintain the upgrade of the website and are
therefore recorded as an expense of the period. These costs are
matched to the revenues earned during the period in which these costs (expenses) are incurred. The
generally accepted accounting principle that plays a part in the recording of these types of
transactions is the matching principle.
Costs incurred for the website upgrade increase the operating efficiency of the website and therefore
increase the value of the fixed asset account, Website. Cookie Creations will now be able to accept
orders over the Internet expanding the area in which the business can operate. The website will
become a much more productive investment after the upgrade. The generally accepted accounting
principle in question is the matching principle. The website asset will be used to carry out activities
such as order entry and promotion of the products Cookie Creations is selling. The website asset has
the ability to provide future economic benefit that will generate future cash benefits.
Part 2
(a) Purchase price............................................................... $35,500
Painting .......................................................
..................... 2500
Shelving .......................................
.................................... 1500
Cost of van...............................................
....................... $39500
(b) Straight-line depreciation

Year
Depreciable
Deprecia
Annual
Accumu
Cost (a)
Rate (b)
Deprecia
Deprecia
Vallue
$39,500
2010
2011
2012
2013

$33,000
33,000
33,000
33,000

20% X 4/12
20%
20%
20%

2014
33,000
20%
2015
33,000
20% X 8/12
$33,000
(a) ($39,500 $6,500)
(b) 1/5 = 20%

$ 2200
6600
6600
6600
6600
4400

Book

$ 2200
8800
15400
22000

$37300
30700
24100
17500

28600
10900
33000 6,500

Part 2 (Continued)
(c) Natalie should use a special depreciation method for tax purposes. Using an accelerated method,
rather than the straight line method, will minimize income tax expenses in the early years of an
assets life. Paying less tax will allow Natalie to use cash for other purposes.
Natalie is not required to use the same depreciation method for financial reporting and tax reporting.
Like many businesses, she may choose straight-line depreciation for financial reporting and an
accelerated method for tax reporting.