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? a. Depreciation expense b. Accumulated depreciation c. Book value

Question

Business

Ruby Sloan

31 July, 16:43

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? a. Depreciation expense b. Accumulated depreciation c. Book value

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Answers (1)

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Nigel Goodwin · Answer 1

a. $10,000

b. $19,000

c. $41,000

Explanation:

The computations are shown below:

The depreciation per hour would be

= (Original cost - residual value) : (estimated machine hours)

= ($60,000 - $10,000) : (20,000 hours)

= ($50,000) : (20,000 hours)

= $2.5 per hour

a. Now for the second year, it would be

= Machine hours in second year * depreciation per hour

= 4,000 units * $2.5

= $10,000

b. Accumulated depreciation would be

= (Machine hours in year 1 + Machine hours in year 2) * depreciation per hour

= (3,600 hours + 4,000 hours) * $2.5

= $19,000

c. And, the book value would be

= Original cost - accumulated depreciation

= $60,000 - $19,000

= $41,000