Question

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

Answer 1

Answer:

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