Question

A company paid $505,000 to purchase equipment and $15,500 to have the equipment delivered to and installed in the company's production facilities. The equipment is expected to be used a total of 28,500 hours throughout its estimated useful life of seven years. The estimated residual value of the equipment is $5,500. The company began using the equipment on May 1, 2018. The company has an October 31, 2018 year-end. It used the equipment for a total of 11,700 hours between May 1 and October 31, 2018. Using the units-of-production method, what amount of depreciation expense would the company report in the income statement prepared for the year-ended October 31, 2018?

Answer 1

Answer:

Using the units-of-production method, the amount of depreciation expense the company would report in the income statement prepared for the year-ended October 31, 2018 would be $105,711.

Explanation:

The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:

(Original Cost - Salvage value) / Estimated production capacity x Units/year

Depreciation expense (DE) is: ($520,500 - $5,500) / 28,500 operating hours x 11,700 hours = $211,421 yearly depreciation expense.

Depreciation from May 1 to October 31, 2018 (6 months): $211,421 / 2 = $105,711