On January 1, Year 1, Andrei’s Design Inc., purchased equipment for $60,000. Res

Question

On January 1, Year 1, Andrei’s Design Inc., purchased equipment for $60,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. The company expects the machine to operate for 20,000 hours. The machine operated for 3,600 and 4,000 hours in Year 1 and Year 2, respectively. The company uses the units-of-production method. For how much would each item below be reported at the end of Year 2?

Knowledge Check 01 On January 1, Year 1, Andrei's Design Inc., purchased equipment for $60,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. The company expects the machine to operate for 20,000 hours. The machine operated for 3,600 and 4,000 hours in Year 1 and Year 2, respectively. The company uses the units-of-production method. For how much would each item below be reported at the end of Year 2? 1. Depreciation expense 2. Accumulated depreciation 3. Book value

Explanation / Answer

note:

depreciation per unit = (cost - salvage value) / number of units expected to operate.

=> (60,000 - 10,000) / 20,000 hours

=>$2.5 per hour.

1. depreciation expense in year 2 = 4,000 hours used * $2.5 =>$10,000.

2.accumulated depreciation = (3600 hours +4,000 hours used till end of year 2 ) * $2.5 per hour

=>$19,000

3.book value = cost - accumulated depreciation =$60,000 - $19,000

=>$41,000.

1. depreciation expense $10,000 2.accumulated depreciation $19,000 3. book value $41,000

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