Scribd
Upload
277 views2 pages

Simulation 4

The Northwood Clinic purchased a surgical laser for $75,000 that has a 4 year useful life and estimated residual value of $7,500. In years 1-4, the laser was used 1,600, 2,100, 3,400, and 2,900 hours respectively. Straight-line depreciation results in a higher annual and total depreciation expense compared to units-of-production. The units-of-production method results in the lowest reported annual and total profits over 4 years. In year 1, units-of-production also results in the lowest cash flow.

Uploaded by

nelsonquilelli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
277 views2 pages

Simulation 4

The Northwood Clinic purchased a surgical laser for $75,000 that has a 4 year useful life and estimated residual value of $7,500. In years 1-4, the laser was used 1,600, 2,100, 3,400, and 2,900 hours respectively. Straight-line depreciation results in a higher annual and total depreciation expense compared to units-of-production. The units-of-production method results in the lowest reported annual and total profits over 4 years. In year 1, units-of-production also results in the lowest cash flow.

Uploaded by

nelsonquilelli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Simulation 4

The Northwood Clinic purchased a new surgical laser for $ 75,000. The estimated residual
value is $ 7,500. The laser has a useful life of four years and the clinic expects to use it 10,000
hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 3,400 hours in year 3; 2,900
hours in year 4.

a) Calculate the annual depreciation for each of the four years under each of the following
methods:
i) straight-line (5 points)

Straight line method


Yea Depreciabl Depreciatio Depreciatio Accumulated
r e amount n rate = n exp. depreciation Carrying amount

$75000

1 67500 25% 16875 16875 5815

2 67500 25% 16875 33750 41250

3 67500 25% 16875 50625 24375

4 67500 25% 16875 67500 7500

ii) units-of-production (5 points)

Units of production
Year Estimated hours Hours per year Total
1 10.000 1600 8400
2 8.400 2100 6300
3 6.300 3400 2900
4 2.900 2900 0
b) If you were the administrator of the clinic, which method would you deem as most appropriate?
Justify your answer. (6 points)

Straight line method because of the use that the asset has during its probable useful life, if at
the end of its useful life it could still be used or still has some value in profit from the sale of
fixed assets. The straight-line method is more accurate annually.

c) Which method would result in the lowest reported profit in the first year? Which method
would result in the lowest total reported profit over the four-year period? (6 points)

c.1 The straight-line method is the lowest reported profit in the first year giving an
approximate of 2250 hours of production. This is taken from the annual depreciation
expense under the straight-line method. (16.875 x 10.000 / 75.000) = 2.250 hours

c.2 The method of production hour units is the one that reports the lowest profit during the
four years of life of the asset, remaining in its entirety at 0.

d) Which method would result in the lowest cash flow in Year 1? Over the life of the asset? (6
points)

D. The method that results in the lowest cash flow in year 1 is the production method giving a
cash flow of $12,000 in the first year (1600 x 75,000/ 10,000) = 12,000

You might also like