A company paid $500,000 to purchase equipment and $15,000 to have the equipment delivered to and installed in the company's production facilities.Commercial use of the equipment began on May 1,2014.The estimated residual value of the equipment is $5,000.The equipment is expected to be used a total of 28,000 hours throughout its estimated useful life of six years.The company has an October 31,2014 year-end and had used the equipment a total of 11,200 hours prior to the year-end.Using the units- of- production method,what amount of depreciation expense (to the nearest thousand)would the company report for this equipment in the income statement prepared for the year-ended October 31,2014?

Question

Quizplus · Accepted Answer

To calculate the depreciation expense using the units-of-production method, we need to follow these steps:

Step 1: Calculate the total number of units that the equipment can produce over its useful life.

Total units = (Estimated total hours of use) / (Total Estimated Useful Life in hours)

Total units = 28,000 / 6 = 4,666.67 units

Step 2: Calculate the depreciation rate per unit.

Depreciation rate = (Cost of equipment – Residual value) / Total units

Depreciation rate = ($500,000 - $5,000) / 4,666.67 units = $106.67 per unit

Step 3: Calculate the depreciation expense for the year.

Depreciation expense = Depreciation rate per unit x Actual units used in the year

Depreciation expense = $106.67 per unit x 11,200 units = $1,195,733.33

However, we need to adjust this amount because the company only used the equipment for a portion of the year. We can prorate the expense by using the following formula:

Adjusted depreciation expense = Depreciation expense x (Actual months of use / Total months in the year)

Adjusted depreciation expense = $1,195,733.33 x (7 / 12) = $697,680

Rounded to the nearest thousand, the depreciation expense would be $204,000. Therefore, the best choice is C.

A Company Paid $500,000 to Purchase Equipment and $15,000 to Have