A factory machine was purchased for $375000 on January 1 2017. It was estimated that it would have a $75000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40000 hours in the 5 years. The company ran the machine for 4000 actual hours in 2017. If the company uses the units-of-activity method of depreciation the amount of depreciation expense for 2017 would be
A) $37500.
B) $60000.
C) $75000.
D) $30000.

Question

Quizplus · Accepted Answer

The units-of-activity method calculates depreciation based on the actual usage of the asset. The total cost minus salvage value ($375,000 - $75,000 = $300,000) is divided by the total estimated usage (40,000 hours) to find the depreciation per hour, which is then multiplied by the actual usage in 2017 (4,000 hours). This results in a depreciation expense of $30,000 for 2017.

A Factory Machine Was Purchased for $375000 on January 1