Financial Accounting

Question

Mohr Company purchases a machine at the beginning of the year at a cost of $26,000. The machine is depreciated using the units-of-production method. The company estimates it will use the machine for 5 years, during which time it anticipates producing 42,000 units. The machine is estimated to have a $5,000 salvage value. The company produces 9,200 units in year 1 and 6,200 units in year 2. Depreciation expense in year 2 is:

Answer 1

Under Unit of method Depreciation, cost recovery happens based on the Deprecation rate per Unit, which is calculated based on the Estimated Capacity of the Asset.

Rate of Depreciation = (Cost of the Asset - Salvage Value) / Estimated Production capacity of the Assets in terms of number of Units.

Depreciation Expense = Rate of Depreciation X Number of Units produced.

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Cost recovery through Depreciation starts when Actual production happens.

Cost recovery through Depreciation ends when the Asset cost (less salvage) is fully recovered or if the Estimated Production capacity in Units is actually achieved.

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Answer

Rate of Depreciation Unit recovery = (26000 - 5000) / 42000 = $0.50 per Unit

Year 1 Depreciation = 0.5 x 9200 = $4600

Year 2 Depreciation = 0.5 X 6200 = $3100

Extending the Problem. Year 3 Production = 27000 Units.

If you come up with the Answer 0.5 X 27000 = $13500, then the Answer is wrong :) ...Because if you add all the Depreciation = $4600 + $3100 + $13500 = $ 21200 which is more than the Asset cost to be recovered (after salvage). At any point in time Depreciation cannot exceed $21000 ($26000 - $5000)

Right Answer for Year 3 Depreciation is $21000 - $4600 - $3100 = $13300