On January 1 of the current year (Year 1), our company acquired a truck for $75,000. The estimated useful life of the truck is 5 years or 100,000 miles. The residual value at the end of 5 years is estimated to be $5,000. The actual mileage for the truck was 22,000 miles in Year 1 and 27,000 miles in Year 2. What is the depreciation expense for the second year of use (Year 2) if we use the units of production method

Question

Gemma Petty

Business

14 February, 01:35

On January 1 of the current year (Year 1), our company acquired a truck for $75,000. The estimated useful life of the truck is 5 years or 100,000 miles. The residual value at the end of 5 years is estimated to be $5,000. The actual mileage for the truck was 22,000 miles in Year 1 and 27,000 miles in Year 2. What is the depreciation expense for the second year of use (Year 2) if we use the units of production method

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Yazmin · Answer 1

The depreciation expense for the second year of use (Year 2) if we use the units of production method is $18,900.

Explanation:

Units of production method is depreciation method that considers the number of units that an asset produces more closely relevant than the number of economic useful life of the assets. The method therefore produces a greater depreciation expenses in years when the assets is heavily put into use.

Under the units of production method, the depreciation expenses for a particular is the original cost of the equipment minus its salvage value, and this is then multiplied by the ratio of the expected number of units the asset should produce in that year to the number of units the asset is expected to produce in its useful life. Mathematically, this can be stated as follows:

Depreciation expenses for a particular = (Cost - Salvage/Residual value) * (Units produced in the year / Total units expected to produce throughout useful life)

To calculate the depreciation expense for the second year of use (Year 2) in this question, use the above formula as follows:

Depreciation expenses in Year 2 = ($75,000 - $5,000) * (27,000 / 100,000) = $70,000 * 0.27 = $18,900

Therefore, the depreciation expense for the second year of use (Year 2) if we use the units of production method is $18,900.

NB - Extra Information that can assist your learning:

Although this is not part of the question, but we can also compute the depreciation expenses for Year 1 in order to compare it with Year 2 as follows:

Depreciation expenses in year 1 = ($75,000 - $5,000) * (22,000 / 100,000) = $70,000 * 0.22 = $15,400.

We can see that the depreciation expenses of $18,900 for Year 2 is greater than the depreciation expenses of $15,400 for Year 1. The reason is that the truck is more heavily used in Year 2 at 27,000 miles than in Year 1 at just 22,000 miles.