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 1,2018.The company has an October 31,2018 year-end.It used the equipment for a total of 11,200 hours between May 1 and October 31,2018.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 31,2018?

Question

Quizplus · Accepted Answer

Cost includes all necessary and reasonable expenditures to acquire the asset and prepare it for its intended use.
Cost = Purchase price + Delivery and installation costs
= $500,000 + $15,000 = $515,000
Depreciation expense this period = (Cost − Residual value)× (Actual production this period ÷ Estimated total production)
= ($515,000 − $5,000)× (11,200 ÷ 28,000)= $204,000

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