The Nichols clinic purchased a new surgical laser for 96,000. The estimated salv

Question

The Nichols clinic purchased a new surgical laser for 96,000. The estimated salvage value is 6,000. The laser has a useful life of 5 years and the clinic expects to use it at 10,000 hours. It was used 1,600 hours in year 1. 2,200 hours in year 2. 2,4000 in year 3. 2,300 hours in year 4. 2,000 hours in year 5.

Instructions: Compute the annual depreciation for each of the five years under each of the following methods.

(1) straight line (2) units of activity.

(b) If you were the administrator of the clinic which method would you deem as most appropiate? Justify your answer.

(c) Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the 5 year period?

~~~~~Please show solution and explanation. Thank you

Explanation / Answer

the carter clinic purchased a new surgical laser for 72,000. The estimated residual value is $6,000. The laser has a useful life of 6 yrs and the clinic expects to use it 10,000 hours. It was used 1,600 hours in yr 1; 2,100 in yr 2; 2,400 hrs in yr 3; 1,400 hrs in yr 4; 2,000 hrs in yr 5, 500 hrs in yr 6

Calculate the annual amortization for each of the 6 yrs under each of the following methods:
Straight line and units of activity

Straight Line = (72,000 - 6,000) / 6 = $11,000 - all years

Units of Activity
Year 1 $10,560
Year 2 $13,860
Year 3 $15,840
Year 4 $9,240
Year 5 $13,200
Year 6 $3,300


If you were the administrator of the clinic, which method would you use why?

Units of Activity, because it matches the expense with the income generated from the use of the machine.

Which methods would result in the lowest reported income in the first year?

Straight Line

Which method would result in the lowest total reported income over the 6th year period?

Straight Line - if you mean, just the 6th year. But if the question is asking about the entire 6 year term, then the income would fluctuate by year, but the total income for the 6 years would be the same.


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