On January 1, Year 1, Milton Manufacturing Company purchased equipment with a list price of $88,000. A total of $4,000 was paid for installation and testing. During the first year, Milton paid $6,000 for insurance on the equipment and another $2,200 for routine maintenance and repairs. Milton uses the units-of-production method of depreciation. Useful life is estimated at 100,000 units, and estimated salvage value is $8,000. During Year 1, the equipment produced 13,000 units. What is closest to the amount of depreciation for the year?

Question

Quizplus · Accepted Answer

The cost of the equipment includes the purchase price plus costs necessary to get it ready for use, which totals $88,000 + $4,000 = $92,000. Insurance and maintenance are operating expenses, not capital expenditures, so they are not included in the asset's cost. The depreciation expense is calculated based on the units-of-production method: [(Cost - Salvage Value) / Total Estimated Units] * Units Produced in Year 1 = [($92,000 - $8,000) / 100,000] * 13,000 = $84,000 / 100,000 * 13,000 = $10,920.

On January 1, Year 1, Milton Manufacturing Company Purchased Equipment