Madison, Inc., purchased equipment at a cost of $84,000. The equipment has an es

Question

Madison, Inc., purchased equipment at a cost of $84,000. The equipment has an estimated residual value of $12,000 and an estimated life of 6 years, or 10,000 hours of operation. The equipment was purchased on January 1, 2004. During the first year of operation, it was used for 1,500 hours.

Refer to Madison, Inc-Equipment. If Madison uses the Units-Of-Production Method, how much depreciation expense will be recorded for 2004 ?

$ 12,600

$ 10,800

$ 84,000

$ 72,000

$ 12,600

$ 10,800

$ 84,000

$ 72,000

Explanation / Answer

Depreciation rate per unit = (Cost-Salvage value)/Estimated Hour of operation

Depreciation rate per unit = (84000-12000)/10000

Depreciation rate per unit = $ 7.20

If Madison uses the Units-Of-Production Method,

Depreciation expense will be recorded for 2004 = Depreciation rate per unit * Hour of operation used

Depreciation expense will be recorded for 2004 = 7.20*1500

Depreciation expense will be recorded for 2004 = $ 10800

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