On January 2, 2013, Benson Hospital purchased a $101,300 special radiology scann
ID: 2452505 • Letter: O
Question
On January 2, 2013, Benson Hospital purchased a $101,300 special radiology scanner from Picard 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 $105,549. Approximately one year later, the hospital is approached by Dyno Technology salesperson, Meg Ryan, who indicated that purchasing the scanner in 2013 from Picard Inc. was a mistake. She points out that Dyno has a scanner that will save Benson Hospital $29,416 a year in operating expenses over its 3-year useful life. She notes that the new scanner will cost $109,685 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. Ryan agrees to buy the old scanner from Benson Hospital for $39,863. If Benson Hospital sells its old scanner on January 2, 2014, compute the gain or loss on the sale. Prepare an incremental analysis of Benson Hospital.Explanation / Answer
Answer:
(a) Computation of gain or loss on sale, If Benson Hospital sells its old scanner on January 2, 2014
Carrying Value of Scanner of Benson Hospital as on January 2, 2014 = Cost of Scanner – Depreciation of 1 year = $101,300 – ($101,300 / 4) = $101,300 - $25,325 = $75,975
Sale Proceed from Scanner of Benson Hospital = $39,863
Loss on Sale of Scanner of Benson Hospital (January 2, 2014) = Sales Proceed – Carrying Value of Scanner = $39,863 - $75,975 = -$36,112
(b)
Incremental Analysis of Benson Hospital
Retain Scanner
Replace Scanner
Net Income Increase / (Decrease)
Annual Operating Cost
$105,549
$76,133
-$29,416
New Scanner Cost
$0
$109,685 - $39,863 = $69,822
$69,822
Old Scanner Salvage Value
$0
$0
$0
Total
$105,549
$145,955
$40,406
Note1:
It is assumed that if scanner is replaced, the net proceed from old scanner will also used to purchase a new scanner. So that New Scanner Cost will reduce by net proceed from old scanner. New Scanner net cost will be $69,822 ($109,685 - $39,863)
Note2:
Requirement of second part of question is not clear. What is understandable from the question and data table, I have tried to represent in above table. If you need any further clarification, please write me.
Retain Scanner
Replace Scanner
Net Income Increase / (Decrease)
Annual Operating Cost
$105,549
$76,133
-$29,416
New Scanner Cost
$0
$109,685 - $39,863 = $69,822
$69,822
Old Scanner Salvage Value
$0
$0
$0
Total
$105,549
$145,955
$40,406
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