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.The equipment is expected to be used a total of 28,000 hours throughout its estimated useful life of six years.The estimated residual value of the equipment is $5,000.The company began using the equipment on May 1,2016.The company has an October 31,2016 year-end.It used the equipment for a total of 11,200 hours between May 1 and October 31,2016.Using the units-of- production method,what amount of depreciation expense would the company report in the income statement prepared for the year-ended October 31,2016?
A) $102,000
B) $198,000
C) $204,000
D) $206,000

Question

Quizplus · Accepted Answer

Step 1: Determine the total units of production:
Total estimated hours of use = 28,000
Hours of use from May 1 to October 31, 2016 = 11,200
Total estimated units of production = 28,000
Units of production in 2016 = 11,200
Step 2: Calculate the depreciation rate:
Depreciation rate = (Cost - Residual value) / Total estimated units of production
Depreciation rate = ($500,000 + $15,000 - $5,000) / 28,000 = $510,000 / 28,000 = $18.21 per unit
Step 3: Calculate depreciation expense for 2016:
Depreciation expense for 2016 = Depreciation rate x Units of production in 2016
Depreciation expense for 2016 = $18.21 x 11,200 = $204,192, rounded to $204,000. 
Therefore, the answer is (C) $204,000.

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