Exercise 7-13 On January 2, 2016, Twilight Hospital purchased a $99,200 special

Question

Exercise 7-13 On January 2, 2016, Twilight Hospital purchased a $99,200 special radiology scanner from 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 Bella Inc. The scanner had a useful life of 4 years Annual operating costs with this scanner are $104,000 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 Twiight Hospital $25,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $111,000 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 $49,000 If Twilight Hospital sells its old scanner on January 2, 2017, compute the gain or loss on the sale. LINK TO TEXT

Explanation / Answer

Solution- Part 1: Twilight Hospital has bought the scanner for $99,200 from Bella Inc. on Jan 2, 2016. Scanner in question is having 4 yearsof usefu life with no salvage value. It means that Hospital will have to write off entire $99,200 in upcoming 4 years. Depreciation for an year comes to $99,200/4= $24,800.

On Jan 2, 2017, Scanner would be 1 year old and will be having accumulated depreciation for 1 year. Book value for old scanner would stand as $74,400 ($99,200 - $24,800) afer accumulated depreciation.

If the hospital sells its old scanner at a price of $ 49,000 on Jan 2, 2017: Hospital would incur a loss of $25,400 (Sale Price- Book value= 49,000 - 74,400).

Solution- 2: Solution will appear as below:

Notes:

1. Operating cost will be computed for 3 years since new scanner's life is for 3 years. Difference between old scanner and new scanner operating cost would be 75,000 for 3 years (25,000*3)

2.

Solution 3: Yes, Twilight Hospital should but new scanner since it will save an amount of $13,000 in next 4 years.

Retain Scanner Replace Scanner Net Income (Increase/Decrease) Operating costs 312,000 237,000 75,000 New Scanner costs 0 111,000 -111,000 Old Scanner Salvage 0 -49000 49,000 Total 312,000 299,000 13,000

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