Jensen Inc., a graphic arts studio, is considering the purchase of computer equipment and software for a total cost of $18,000. Jensen can pay for the equipment and software over three years at the rate of $6,000 per year. The equipment is expected to last 10 to 20 years, but because of changing technology, Jensen believes it may need to replace the system in as soon as three to five years. A three-year lease of similar equipment and software is available for $6,000 per year. Jensen’s accountant has asked you to recommend whether the company should purchase or lease the equipment and software and to suggest the length of time over which to depreciate the software and equipment if the company makes the purchase.

Required:

Ignoring the effect of taxes, would you recommend the purchase or the lease? Why or why not? Referring to the definition of depreciation, what appropriate useful life should be used for the equipment and software?

Problem 4

Bardoo Inc. is looking at replacing some equipment in one of itsplants. Relevant data to the purchase of the equipment is asfollows :

Cost of theequipment $320,000

Annual saving provided by the newequipment 60,000

Salvage value of the oldequipment 30,000

Expected life of the newequipment 8 years

Required.

The owner of Bardoo would like to recoup his original investmentin less than five years. Compute the payback period for theinvestment. Would you recommend that the equipment be purchased?Provide a brief explanation as to your recommendation.

Bardoo's cost of capital is 14%. Compute the unadjusted orsimple rate of return on the investment. Would you recommend thatthe equipment be purchased? Provide a brief explanation as to yourrecommendation.

Problem 4

Bardoo Inc. is looking at replacing some equipment in one of itsplants. Relevant data to the purchase of the equipment is asfollows :

Cost of theequipment $320,000

Annual saving provided by the newequipment 60,000

Salvage value of the oldequipment 30,000

Expected life of the newequipment 8 years

Required.

The owner of Bardoo would like to recoup his original investmentin less than five years. Compute the payback period for theinvestment. Would you recommend that the equipment be purchased?Provide a brief explanation as to your recommendation.

Bardoo's cost of capital is 14%. Compute the unadjusted orsimple rate of return on the investment. Would you recommend thatthe equipment be purchased? Provide a brief explanation as to yourrecommendation.

Accounting Fundamentals For Health Care Management

Chapter 10, Test Your Knowledge

1. Which GAAP requires the use of depreciation for assets thathave useful lives beyond 1 year?

2. Explain why the (the answer to ques 1) GAAP__________requires the use of depreciation fo assets that have useful livesbeyond 1 Year.

3. Explain the four steps in the depreciation process.

4. The York City Hospital has just acquired new equipment. Theequipment cost $4,250,000, and the organization spent $135,000 onupgrading the physical plant the new equipment will be located in.The equipment is expected to have 10- year useful life and asavlvage value of 10% (i.e, $425,000). Calculate the first 5 yearsof depreciation, using the following methods:

a.) Stright Line Method

b.) Double Declining Balance Method

c.) Sum-of the-Years Digits method

4. A new medical practice purchases computer equipment that cost$15,000, to be used for medical billing. In addition, the practicepurchases billing software that cost $5,000. Both the computerequipment and the software are expected to have 3-Year useful livesand no salvage vaule. Calculate the 3 years of depreciation, usingthe following methods:

a.) Stright Line Method

b.) Double Declining Balance Method

c.) Sum-of the-Years Digits method

5. The New Hospital has raised money for a new oncology wing.The hospital has also aquired medical diagnostic equipment thatcost $500,000. In addition, the hospital paid $15,000 to ship theequipment from the manufacturer and $40,000 to install theequipment. The equipment is expected to have a 6-year useful lifeand a $30,000 salvage value. Calculate the 6 years of depreciationusing the following methods:

a.) Stright Line Method

b.) Double Declining Balance Method

c.) Sum-of the-Years Digits method

6. For-profit organizations can use different methods forreporting depreciation to owners and to the government (for taxpurposes). What is the practical effect of theis allowance?

Record depreciation for two months on the computer software andequipment bought in transaction # 13 and 14. Assume salvage valueis zero to calculate deprecation. Use the straight line method asdescribed in Accounting Policies section


transactions 13 and 14:

Nov. 11 The Company purchases a lient-tacking program (computersoftware) on account for 600 form Hewllett Packard

Nov. 12 The company purchases a desktop compute ron aacount for the1500 form Best Buy.