In this case, when Rob recorded the depreciation of computer equipment, he chose the straight-line method, acceptably so because the computer server’s output cannot be counted by unit. We also cannot determine that there is a higher amount of depreciation expense in the early years than in the later years. In addition, based on my research, some big companies like eBay and Amazon also use the straight-line method to record the depreciation expense of computer servers. In regards to this, I unfortunately did observe a problem.
Rob decided the useful life of the new server is ten years. I do not think it is very acceptable, because the useful life of the first server is only two years. Based on common sense, there should not be such a big difference between these two servers. I did some research and found that the typical useful life of a computer server should be between two and three years. Recording the useful life of the new server as three years is more appropriate here. By overestimating the useful life of the new server, Rob reduced the yearly depreciation expense which led to a higher net income in 2011. If we assume the useful life of the new server is three years, the depreciation expense of it from January 3, 2011 to September 30, 2011 will be $600 ($2,400/3/12*9=$600). Then the total depreciation expense of 2011 will be $806 ($825-$619+$600=$806). Accordingly, the net income of 2011 will decrease by $420 ($806-$386=$420). When Mr. Conley buys out Rob, he can pay him $2,100 ($420*5=$2,100) less.
The bill for WAG’s web site work in the fiscal year 2011 was $9,000. Rob capitalized the full amount. I do not think the capitalization is acceptable. There was $2,000 that should have been capitalized, because it was used for new site development. The development of the new site will generate profit for the company in the future, therefore allowing it to be capitalized as an asset. On the other hand, the $7,000 used for regular maintenance should not be...
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