The Sonny Clinic purchased a new surgical laser for $800,000. The estimated salv

Question

The Sonny Clinic purchased a new surgical laser for $800,000. The estimated salvage value is $80,000. The laser has a useful life of six years and the clinic expects to use it 100,000 hours. It was used 15,000 hours in year 1; 20,000 hours in year 2; 24,000 hours in year 3; 10,000 hours in year 4; 20,000 hours in year 5; 11,000 hours in year 6

Instructions

(a)    Compute the annual depreciation for each of the six 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 appropriate? 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 five-year period?

Explanation / Answer

(a)

(1)

$ 1,20,000

(2)

(b)

The units-of-production method can be more useful for determining exact profitability figures for productive assets, products, departments or business units. Continuing the trucking company example, company accountants can use the units-of-production method to determine exact costs per mile for both the company and its independent contractors. The straight-line method can be more useful for assets that cannot be conveniently pegged to specific output. The straight-line method can make more sense for depreciating cash outlays for buildings and facilities.

(c) In the first year, Income under Straight Line Depreciation Method($ 120,000) will be Lower than unit of activity method ($ 108,000).

In the five year, Income under Unit of Activity Depreciation Method($ 640,800) will be Lower then Straight Line method ($ 600,000).

Annual Depreciation Using Staight Line Method: = Initial Cost-Salvage Value/Useful Life = (800000-80000)/6 =

$ 1,20,000

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