## Required

- 1. In addition to the contribution margin figures already computed, now compute the PV ratio (also known as the CM ratio).
- 2. Add another column to your worksheet and compute the clinic’s per-visit revenue and costs.
- 3. Create a Cost-Volume-Profit chart. Refer to the chapter text along with Figure 7–6.

**CHAPTER 8**

**Assignment Exercise 8–1: FIFO and LIFO Inventory**

Study the FIFO and LIFO explanations in the chapter.

## Required

- a1. Use the format in Exhibit 8–1 to compute the ending FIFO inventory and the cost of goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of 400 units @ $50; 100 units @ $65; 400 units @ $80.
- a2. Also compute the cost of goods sold percentage of sales.
- b1. Use the format in Exhibit 8–2 to compute the ending LIFO inventory and the cost of goods sold, using same assumptions.
- b2. Also compute the cost of goods sold percentage of sales.
- c. Comment on the difference in outcomes.

**Assignment Exercise 8–2: Inventory Turnover**

Study the “Calculating Inventory Turnover” portion of the chapter closely, whereby the cost of goods sold divided by the average inventory equals the inventory turnover.

## Required

Compute two inventory turnover calculations as follows:

- 1. Use the LIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.
- 2. Use the FIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.

**Example 8A: Depreciation Concept**

Assume that Metropolis Health System (MHS) purchased equipment for $200,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows:

- Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10% salvage value or 20,000 equals 180,000.
- Step 2. Divide the resulting figure by the expected life (also known as estimated useful life): 180,000 divided by 10 equals 18,000 depreciation per year for 10 years.

Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the life of the asset. One example of accelerated depreciation is the double-declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses *book value*, which is the net amount remaining when cumulative previous depreciation is deducted from the asset’s cost. The computation is as follows:

- Step 1. Compute the straight-line rate: 1 divided by 10 equals 10%.
- Step 2. Now double the rate (as in
*double-declining method*): 10% times 2 equals 20%. - Step 3. Compute the first year’s depreciation expense: 200,000 times 20% equals 40,000.
- Step 4. Compute the carry-forward book value at the beginning of the second year: 200,000 book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at the beginning of the second year of 160,000.
- Step 5. Compute the second year’s depreciation expense: 160,000 times 20% equals 32,000.
- Step 6. Compute the carry-forward book value at the beginning of the third year: 160,000 book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at the beginning of the third year of 128,000.
- — Continue until the asset’s salvage or trade-in value has been reached.
- — Do not depreciate beyond the salvage or trade-in value.

**Practice Exercise 8–I: Depreciation Concept**

Assume that MHS purchased equipment for $600,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

## Required

- 1. Compute the straight-line depreciation for this purchase.
- 2. Compute the double-declining balance depreciation for this purchase.

**Assignment Exercise 8–3: Depreciation Concept**

Assume that MHS purchased two additional pieces of equipment on April 1 (the first day of its fiscal year), as follows:

- 1. The laboratory equipment cost $300,000 and has an expected life of = years. The salvage value is 5% of cost. No equipment was traded in on this purchase.
- 2. The radiology equipment cost $800,000 and has an expected life of 7 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

## Required

For both pieces of equipment:

- 1. Compute the straight-line depreciation.
- 2. Compute the double-declining balance depreciation.

**Example 8B: Depreciation**

This example shows straight-line depreciation computed at a five-year useful life with no salvage value. Straight-line depreciation is the method commonly used for financing projections and funding proposals.

## Depreciation Expense Computation: Straight Line

Five year useful life; no salvage value

Year # |
Annual Depreciation |
Remaining Balance |
---|---|---|

Beginning Balance = | 60,000 | |

1 | 12,000 | 48,000 |

2 | 12,000 | 36,000 |

3 | 12,000 | 24,000 |

4 | 12,000 | 12,000 |

5 | 12,000 | -0- |

**Example 8C: Depreciation**

This example shows straight-line depreciation computed at a five-year useful life with a remaining salvage value of $10,000. Note the difference in annual depreciation between Example 8B and Example 8C.

## Depreciation Expense Computation: Straight Line

Five year useful life; $10,000 salvage value

Year # |
Annual Depreciation |
Remaining Balance |
---|---|---|

Beginning Balance = | 60,000 | |

1 | 10,000 | 50,000 |

2 | 10,000 | 40,000 |

3 | 10,000 | 30,000 |

4 | 10,000 | 20,000 |

5 | 10,000 | 10,000 |

**Example 8D: Depreciation**

This example shows double-declining depreciation computed at a five-year useful life with no salvage value. As is often the case with a five-year life, the double-declining method is used for the first three years and the straight-line method is used for the remaining two years. The double-declining method first computes what the straight-line percentage would be. In this case 100% divided by five years equals 20%. The 20% is then doubled. In this case 20% times 2 equals 40%. Then the 40% is multiplied by the remaining balance to be depreciated. Thus 60,000 times 40% for year one equals 24,000 depreciation, with a remaining balance of 36,000. Then 36,000 times 40% for year two equals 14,400 depreciation, and 36,000 minus 14,400 equals 21,600 remaining balance, and so on.

Now note the difference in annual depreciation between Example 8B, using straight-line for all five years, and Example 8D, using the combined double-declining and straight-line methods.

## Depreciation Expense Computation: Double-Declining-Balance

Five year useful life; $10,000 salvage value

**Practice Exercise 8–II: Depreciation**

Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a five-year useful life, and a $5,000 salvage value.

**Assignment Exercise 8–4: Depreciation**

Set up a purchase scenario of your own and compute the depreciation with and without salvage value.

**Assignment Exercise 8–5: Depreciation Computation: Units-of-Service**

Study the “Units of Service” portion of the chapter closely.

## Required

- 1. Using the format in Table 8–A-5, compute units of service depreciation using the following assumptions:
- Cost to be depreciated = $50,000
- Salvage value = zero
- Total units of service = 10,000
- Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200

- 2. Using the same format, compute units of service depreciation using adjusted assumptions as follows:
- Cost to be depreciated = $50,000
- Salvage value = $5,000
- Total units of service = 10,000
- Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200