Question

On January 1, Year 1, Andrei’s Design Inc., purchased equipment for $60,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. The company expects the machine to operate for 20,000 hours. The machine operated for 3,600 and 4,000 hours in Year 1 and Year 2, respectively. The company uses the units-of-production method. For how much would each item below be reported at the end of Year 2?a. Depreciation expense b. Accumulated depreciation c. Book value

Answer 1

Answer:

a. $10,000

b. $19,000

c. $41,000

Explanation:

The computations are shown below:

The depreciation per hour would be

= (Original cost - residual value) ÷ (estimated machine hours)

= ($60,000 - $10,000) ÷ (20,000 hours)

= ($50,000) ÷ (20,000 hours)

= $2.5 per hour

a. Now for the second year, it would be

= Machine hours in second year × depreciation per hour

= 4,000 units × $2.5

= $10,000

b. Accumulated depreciation would be

= (Machine hours in year 1 + Machine hours in year 2) × depreciation per hour

= (3,600 hours + 4,000 hours) × $2.5

= $19,000

c. And, the book value would be

= Original cost - accumulated depreciation

= $60,000 - $19,000

= $41,000