Financial Accounting: Depreciation Rate and Expense

Question

The Doodad Company purchases a machine for $820,000. The machine has an estimated residual value of $140,000. The company expects the machine to produce two million units. The machine is used to make 540,000 units during the current period.

 

If the units-of-production method is used, the depreciation rate is:
$0.34 per unit.
$1.26 per unit.
$1.52 per unit.
$0.26 per unit.

 

If the units-of-production method is used, the depreciation expense for this period is:
$221,400.
$183,600.
$540,000.
$400,000.

Answer 1

With the units-of-production method the first step is to determine the depreciation per unit.

 

Depreciation per unit = (cost-residual value)/estimated life in units

 

Depreciation per unit = (820,000 -140,000)/2,000,000

 

Depreciation per unit = .34 per unit

 

The second step is to compute the depreciation for the period.

 

Depreciation for the period = depreciation per unit * actual units produced this period

 

Depreciation for the period = .34*540,000

 

Depreciation this period = 183,600