EXPENDITURES AFTER ACQUISITION AND DEPRECIATION

Eastern National Bank installed a wireless encryption device in January 2005. The device cost $120,000. 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 2008 the bank's busi- ness had expanded and modifications to the device were necessary. At the end of 2008, Eastern spent $45,000 on modifications for the device. The modified device was entered into service on the first business day of 2009. Eastern estimates that the expected life of the device from January 2009 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 business that will provide a profit of at least $100,000 per year.

Required:

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. 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.