Spears Corporation bought a machine on January 1, 2011. In purchasing the machine, the company paid $50,000 cash and signed an interest-bearing note for $100,000. The estimated useful life of the machine is 5 years, after which time the salvage value is expected to be $15,000. The machine is expected to produce 67,500 widgets during its useful life. Given this information, if 10,000 widgets are produced in 2012, how much depreciation should be recorded in 2012, assuming that Spears Corporation uses the units-of-production depreciation method?

Question

Quizplus · Accepted Answer

To calculate depreciation using the units-of-production method, we need to calculate the depreciation rate per unit first:

Depreciation rate per unit = (Cost - Salvage value) / Total units of production
= ($50,000 + $100,000 - $15,000) / 67,500
= $135,000 / 67,500
= $2 per unit

Therefore, depreciation for 2012 = Depreciation rate per unit × Number of units produced in 2012
= $2 × 10,000
= $20,000

Spears Corporation Bought a Machine on January 1, 2011