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29 November, 06:23

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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  1. 29 November, 06:38
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    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
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