Question

A factory machine was purchased for $375,000 on January 1, 2018. It was estimated that it would have a $75,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2018. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2018 would be A) $37,500. B) $60,000. C) $75,000. D) $30,000.

Answer 1

Answer:

The amount of depreciation expense for 2018 would be D) $30,000.

Explanation:

The units-of-activity depreciation method is calculated by using the following formula:

Depreciation Expense = [(Cost of machine − Salvage Value)/Life in Number of hours run] x Number of hours actual run  = Depreciation Expense per hour x  Number of hours run.

In the company,

Depreciation Expense per hour = ($375,000 - $75,000)/40,000 = $7.5

The company ran the machine for 4,000 actual hours in 2018.

The amount of depreciation expense for 2018 = $7.5 x 4,000 = $30,000