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, 2011. 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, 2011 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, 2011?

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation rate:

Depreciation Rate = (Cost - Residual Value)/Total Estimated Units of Production 
Depreciation Rate = ($500,000 + $15,000 - $5,000)/28,000 hours 
Depreciation Rate = $510,000/28,000 hours 
Depreciation Rate = $18.21/hour

Next, we need to calculate the depreciation expense for the year-ended October 31, 2011:

Depreciation Expense = Depreciation Rate x Units Used During the Year 
Depreciation Expense = $18.21/hour x 11,200 hours 
Depreciation Expense = $204,192

To the nearest thousand, the amount of depreciation expense would be $204,000 (Choice C).

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