E7-13 On January 2, 2016, Twilight Hospital purchased a $100,000 special radiolo
ID: 2585149 • Letter: E
Question
E7-13 On January 2, 2016, Twilight Hospital purchased a $100,000 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 salesper- son, 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 $25,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $110,000 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 $50,000. Instructions (a) If Twilight Hospital sells its old scanner on January 2, 2017, compute the gain or loss on the sale scanner on January 2, 2017 less of the results indicated by the incremental analysis in (b). (b) Using incremental analysis, determine if Twilight Hospital should purchase the new (c) Explain why Twilight Hospital might be reluctant to purchase the new scanner, regard-Explanation / Answer
SOLUTION
A.
B.
240,000 [(105,000-25,000)*3]
Yes. twilight Hospital should replace the old scanner because it will result in a savings of $15,000 over the next three years.
C. As shown in (a) above, replacing the old scanner will result inreporting a loss of $25,000. Reluctance to report losses of this nature is the usual reason for not recognizing that a poor decision was madein the past. The remaining book value of the old scanner ($75,000) is a sunk cost. It will be deducted in the future, if the scanner is retained, or written off now if it is replaced. However, if it is replaced now, that cost will be partially offset by the salvage value that Jacob is willing to pay ($50,000)
Amount ($) Cost (A) 100,000 Useful Life 4 years Accumulated Depreciation (B) 25,000 Book Value (A-B) 75,000 Sales Proceeds 50,000 Loss on Sale 25,000Related Questions
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