A fishing boat was purchased for $400,000. It is expected to travel 100,000 kilometres over its 5-year life and have a residual value of $40,000. If it travels 10,000 kilometres in the first year, how much depreciation will be charged using the units of output method?
A) $72,000
B) $40,000
C) $36,000
D) $10,000

Question

Quizplus · Accepted Answer

The depreciation per unit of output is calculated as: 
(depreciable cost - residual value) / total expected output

Depreciable cost = purchase price - residual value 
= $400,000 - $40,000 
= $360,000

Total expected output = 100,000 km

Depreciation per unit = ($360,000 - $40,000) / 100,000 km 
= $3.20/km

Depreciation in the first year = distance traveled in the first year x depreciation per unit 
= 10,000 km x $3.20/km 
= $32,000

Therefore, using the units of output method, $32,000 of depreciation will be charged in the first year. Over the 5-year life of the boat, the total depreciation will be $160,000 (i.e. $32,000 x 5).

A Fishing Boat Was Purchased for $400,000