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21 December, 17:07

On January 1, 2016, Milton Manufacturing Company purchased equipment with a list price of $31,000. A total of $2,800 was paid for installation and testing. During the first year, Milton paid $4,200 for insurance on the equipment and another $640 for routine maintenance and repairs. Innovative uses the units-of-production method of depreciation. Useful life is estimated at 100,000 units, and estimated salvage value is $5,600. During 2016, the equipment produced 14,000 units. What is closest to the amount of depreciation for the year?

a) $4,626

b) $3,948

c) $5,320

d) $4,536

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Answers (1)
  1. 21 December, 17:19
    0
    Option (b) $3,948

    Explanation:

    Data provided in the question:

    Purchase price = $31,000

    Installation and testing cost = $2,800

    Insurance on the equipment = $4,200

    Routine maintenance and repairs = $640

    Estimated useful life = 100,000 units

    Estimated salvage value = $5,600

    Number of units produced = 14,000 units

    Now,

    Total cost of the equipment = Purchase price + Installation and testing cost

    = $31,000 + $2,800

    = $33,800

    Rate of depreciation = [ cost - salvage value ] : Number of units produced

    = [ $33,800 - $5,600 ] : 100,000 units

    = $0.282 per unit

    Therefore,

    Depreciation for 14,000 unis

    = Rate of depreciation * 14,000 units

    = $0.282 per unit * 14,000 units

    = $3,948

    Hence,

    Option (b) $3,948
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