On January 2 2002 equipment with a cost of $640000 was purchased in exchange for a note.The equipment has an estimated salvage value of $60000 and an estimated life of 12000 hours.It is to be depreciated by the units-of-activity method.Use the following tabular analysis to determine the adjustment that would be made for depreciation for the first full year if the equipment was used 3000 hours.
A)Increase Accumulated Depreciation and decrease Depreciation Expense by $160000.
B)Decrease Equipment and Notes Payable by $160000.
C)Decrease Equipment and increase Depreciation Expense by $145000.
D)Increase Accumulated Depreciation and Depreciation Expense by $145000.

Question

On January 2 2002 equipment with a cost of $640000 was purchased in exchange for a note.The equipment has an estimated salvage value of $60000 and an estimated life of 12000 hours.It is to be depreciated by the units-of-activity method.Use the following tabular analysis to determine the adjustment that would be made for depreciation for the first full year if the equipment was used 3000 hours. 
A)Increase Accumulated Depreciation and decrease Depreciation Expense by $160000. 
B)Decrease Equipment and Notes Payable by $160000. 
C)Decrease Equipment and increase Depreciation Expense by $145000. 
D)Increase Accumulated Depreciation and Depreciation Expense by $145000.

Quizplus · Accepted Answer

The units-of-activity depreciation method calculates depreciation based on the actual usage or units produced, which is suitable for equipment whose useful life is mainly determined by how much it is used or how much output it produces. To determine the depreciation rate, we need to first subtract the salvage value from the cost, which gives us $640,000 - $60,000 = $580,000 of depreciable base. Then, we divide the depreciable base by the estimated life in units, which gives us $580,000 / 12,000 hours = $48.33 per hour of usage.

In the first year, if the equipment is used for 3,000 hours, we can multiply the hourly depreciation rate by the actual usage to get the depreciation expense for the year, which is $48.33 x 3,000 hours = $145,000. Therefore, we would increase Accumulated Depreciation and Depreciation Expense by $145,000, which is option D.

On January 2 2002 Equipment with a Cost of $640000