Question

musidg . The annett .canİdpueaiased .Rpwsurgical laser for $64, ooo: The estimated balvage value ,000. The laser has a useful life of five years and the clinie expedts to use it 1o,000 hours. It was used 1,600 hours: án year 11 2,100 hours in year 2 2,400 hours in year 3 1,900 hours in year 4 2,000 hours in year 5. INSTRUCTIONS (a) 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 appropriate? Justify your answer. (c) Which method would reault in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?

Answer 1

(a)

1	Straight line Method:
	($64000-$4000)/5 years
	$12000 per year
2	Units of activity Method:
	($64000-$4000)/10000 hours
	$6. hour

Year	Hours	Rate	Depreciation
1	1600	$6	$9,600
2	2100	$6	$12,600
3	2400	$6	$14,400
4	1900	$6	$11,400
5	2000	$6	$12,000

Year	Straight line method	Units of activity method
1	$12,000	9600
2	$12,000	12600
3	$12,000	14400
4	$12,000	11400
5	$12,000	12000
Total	$60,000	$60,000

(B) Based on variable usage the laser receives during its useful life, units of activity method can be justified.

[c] Straight line depreciation method reports lower net income during the first year. Over the five year period both the method will report same depreciation amount.