A company paid $600,000 to purchase equipment and $10,000 to have the equipment

Question

A company paid $600,000 to purchase equipment and $10,000 to have the equipment delivered to and installed in the company's production facilities. Commercial use of the equipment began on May 1, 2014. The estimated residual value of the equipment is $10,000. The equipment is expected to be used a total of 32,000 hours throughout its estimated useful life of 8 years. The company has an October 31, 2014 year-end and had used the equipment a total of 2,000 hours prior to the year-end. Using the units- of- production method, what amount of depreciation expense (to the nearest thousand) would the company report for this equipment in the income statement prepared for the year-ended October 31, 2014?

$18,750
$37,500
$38,125
$31,500

Explanation / Answer

Calculate depreciation expense :

Equipment cost = 600000+10000 = 610000

Salvage value = 10000

Depreciation rate = (610000-10000)/32000 = 18.75 per hour

Depreciation expense on oct 31,2014 income statement = 2000*18.75 = 37500

So answer is b) $37500

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