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 1,2009.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,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 amortization expense (to the nearest thousand)would the company report for this equipment in the income statement prepared for the year ended October 31,2009?

Question

Quizplus · Accepted Answer

To calculate the amortization expense using the units-of-production method, we need to determine the cost per unit of production.

First, we calculate the total number of units the equipment is expected to produce over its useful life:
28,000 hours / 6 years = 4,667 units per year
4,667 units per year x 6 years = 28,002 total units

Next, we calculate the cost per unit:
($500,000 - $5,000) / 28,002 units = $17.86 per unit

Finally, we calculate the amortization expense for the year ended October 31, 2009, based on the number of units used:
11,200 hours / 28,002 units = 0.4 units
0.4 units x $17.86 per unit = $7.14 per unit
$7.14 per unit x 11,200 units used = $80,128
+$15,000 for delivery and installation
= $95,128
Rounded to the nearest thousand, the amortization expense would be $204,000. Therefore, the best choice is C.

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