Bybee Corporation acquired real estate that contained land, building and equipme

Question

Bybee Corporation acquired real estate that contained land, building and equipment. The property cost Bybee $2,090,000. Bybee paid $595,000 in cash and issued a Note Payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $629,000; Building, $1,870,000 and Equipment, $1,241,000. Assume that Bybee uses the units-of-production method when depreciating its equipment. Bybee estimates that the purchased equipment will produce 1,120,000 units over its 5 years useful life and has salvage value of $18,000. Bybee produced 277,000 units with the equipment by the end of the first year of purchase. The equipment costs 693,500.00. What amount will Bybee record for depreciation expense on the equipment in the first year?

Explanation / Answer

An item of property, plant and equipment should initially be recorded at cost and depreciation expense will be calculated on the basis of the cost of acquisition. Howver, if the equipment is revalued later, then the depreciation expense will be adjusted to give effect the reavluation. Here there is no revaluation of the equipment. The equipment will be recorded at cost as it has been purchased by spending cash and in excehnage of notes payable (In case equipnments are purchased in excehnge of another equipment or asset, fair value of the equipment excehnged are taken into consideration to find the acqisition cost of the equipment purchased)

The cost of the equipmewnt is $693500.

The depreciable cost = $693500 - $18000 = $675500

Depreciation per unit = $675500 / 1120000 units = $0.603 per unit (rounded to three decimal point)

Depreciation for the first year = units produced in the first year x depreciation per unit = 277000 units x $0.603 per unit = $167031

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