1.) Dr. Jay is opening an emergency vet service within his community in January. He invested $425,000 cash into the business. Dr. Jay bought vet supplies, equipment, vet software, and office equipment for $200,000. In addition, there is a long-term loan for $50,000. What is his total owner’s equity?
2.) A dental organization has $725,000 as an outstanding loan, for which the principal must be paid at the rate of $150,000 for the next 5 years. In the balance sheet, what would be the current portion of long-term debt and what is the remaining debt?
3.) Plastic Surgery Associates buys surgical lights for $10,000. The lights have an estimated salvage value of $2,000 and a useful life of 5 years. Calculate the straight-line depreciation.
4.) A large urban health maintenance organization (HMO) purchases a vacant office building to house expanded administrative functions for $300,000. Prior to using the building, renovations costing $100,000 are completed. The renovated building has an estimated useful life of 27.5 years, with no residual value. What is the annual charge for depreciation?
Full Answer Section
The current portion of long-term debt is the amount of the long-term debt that is due within one year. The remaining debt is the amount of the long-term debt that is due after one year.
Current portion of long-term debt = $725,000 / 5 years = $145,000
Remaining debt = $725,000 - $145,000 = $580,000
3.) Straight-Line Depreciation for Plastic Surgery Associates
Straight-line depreciation is calculated by dividing the difference between the cost of the asset and its salvage value by the asset's useful life.
Straight-line depreciation = (Cost - Salvage value) / Useful life
Straight-line depreciation = ($10,000 - $2,000) / 5 years = $1,600 per year
4.) Annual Depreciation Charge for HMO
The annual depreciation charge for the HMO is calculated by dividing the cost of the building and renovations by the building's useful life.
Annual depreciation charge = (Cost of building + Cost of renovations) / Useful life
Annual depreciation charge = ($300,000 + $100,000) / 27.5 years = $5,454.55 per year
Conclusion
Dr. Jay's total owner's equity is $675,000.
The current portion of the dental organization's long-term debt is $145,000. The remaining debt is $580,000.
Plastic Surgery Associates' straight-line depreciation for the surgical lights is $1,600 per year.
The HMO's annual depreciation charge for the building and renovations is $5,454.55 per year.
Sample Answer
1.) Dr. Jay's Total Owner's Equity
Dr. Jay's total owner's equity is calculated as follows:
Owner's equity = Cash + Assets - Liabilities
Owner's equity = $425,000 + $200,000 - $50,000 = $675,000
2.) Current Portion of Long-Term Debt and Remaining Debt