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# Annual Depreciation Problem

The Barnett Clinic purchased a new surgical laser for \$64,000. The estimated salvage value is \$4,000. The laser has a useful life of five 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; 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 result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?

#### Solution Preview

Hi there, :)

Here are my solutions:

(a)

1. straight line = (cost - salvage value)/useful life

Gives the same annual depreciation for each full year of an assets life

= 64,000 - 4,000 = 60,000/5 = \$12,000 per year

value after:
year 1 : 48,000 (-12000)
year 2 : 36,000 (-12000)
year 3 : 24,000 (-12000)
year 4 : 12,000 (-12000)
year 5 : 0

2. sum-of-units

64,000-4,000 = 6,000 (take salvage ...

#### Solution Summary

Annual Depreciation is calculated via two methods and the outcomes are analysed

(1) straight-line.
(2) units-of-activity

\$2.19