On January 2, 2016, Twilight Hospital purchased a $92,000 special radiology scan
ID: 2472094 • Letter: O
Question
On January 2, 2016, Twilight Hospital purchased a $92,000 special radiology scanner from Bella Inc. The scanner had a useful life of 4 years and was estimated to have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $105,000.
Approximately one year later, the hospital is approached by Dyno Technology salesperson, Jacob Cullen, who indicated that purchasing the scanner in 2016 from Bella Inc. was a mistake. He points out that Dyno has a scanner that will save Twilight Hospital $24,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $109,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Jacob agrees to buy the old scanner from Twilight Hospital for $43,000.
a) If Twilight Hospital sells its old scanner on January 2, 2017, compute the gain or loss on the sale.
b) Prepare an incremental analysis of Twilight Hospital.
Retain Scanner Replace Scanner Net Income Increase (Decrease) Annual operating costs New scanner cost Old scanner salvage Total Should Twilight Hospital purchase the new scanner on January 2, 2017?Explanation / Answer
(‘a) Gain or Loss on Sale of Old Scanner in 2017
Particular
Amount
Cost of Scanner
92,000
Less: Accumulated Depreciation
(92000/4 year x 1 year)
23,000
Book Value
69,000
Sale Value
43,000
Loss on sale ( Sale value – Book Value)
26,000
(‘b) Incremental Analysis of Twilight Hospital over next three years
Particular
Retain Scanner
Replace Scanner
Increase / (Decrease ) in Net Income
Annual Operating Cost
315,000
(105,000 x 3)
243,000
(81,000 x 3)
72,000
New Scanner Cost
-
109,000
(109,000)
Old Scanner Salvage Value
-
(43,000)
43,000
Total
315,000
309,000
6,000
Considering net increase of $ 6,000 in Net Income in next three years it is advisable to replace the scanner.
Particular
Amount
Cost of Scanner
92,000
Less: Accumulated Depreciation
(92000/4 year x 1 year)
23,000
Book Value
69,000
Sale Value
43,000
Loss on sale ( Sale value – Book Value)
26,000
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