The amount of depreciation expense in year 2 is $5,000.
First, we need to calculate the depreciation rate per unit; the calculation will be as below.
Depreciation per Unit = ( Cost- Salvage Value) / Total Estimated Production Unit
Depreciation per Unit = ($120,000 – $20,000) / 1,000,000 Hours
Rate per Unit = $ 0.1 per Hour
Depreciation Expense = Depreciation Rate per Unit × unit Produced in a Particular Year.
Depreciation Expense = 30,000 Hours × 0.1 per Hour
Depreciation Expense (Total Depreciation) For 1 Year = $ 3,000
Value of Asset after Depreciation = ($ 1,000,000-$3,000) = $ 1,97,000
In 2nd year the said equipment used 50,000 hours then the depreciation amount will be –
Depreciation Expense for year 2 = 50,000 hours × 0.1 per Hour
= $ 5000
Value of Asset after Depreciation = ($1,97,000-$5,000) = $1,92,000.
<h3>What is Unit of Production ?</h3>
The unit of production method depreciation begins when an asset begins to produce units. It ends when the cost of the unit is fully recovered or the unit has produced all units within its estimated production capacity, whichever comes first.
Whereas, according to the formula:
Cost: It includes purchased price, installation, delivery charge, incidental expenses
Salvage Value: It is the value that will receive at the end of the life of an asset.
Estimated Unit of Production: It estimates the unit produced by the asset over its useful life.
Thus, The Roark Corp. should report a depreciation expense of $5,000 in Year 2.
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