What is the depreciation expense in the following case?
Ace company purchased a machine valued at $320,000 on August 1. The equipment has an estimated useful life of five years or 2.5 million units. The equipment is estimated to have a salvage value of $8,200. What is the amount of depreciation expense that needs to be recorded at the end of the second year if 710,000 units were produced?
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We are given the initial cost of the machine as $320,000 and it is expected to produce 2.5 million units. The question provides information which asks for the application of many methods of calculating depreciation simultaneously, which is not possible to do.
Using the units of production method of depreciation doesn’t require the useful lifespan or the salvage value.
The depreciation expense according to this method is given by (depreciation expense per unit)*(number of units produced). The depreciation expense per unit is given by (initial cost)/ (estimated number of units that can be produced)
For the given machine the depreciation expense is (320,000/2,500,000). The number of units manufactured is 710,000. This gives the total depreciation expense as (320,000/2,500,000)*710,000 = $ 90880.
The required depreciation expense is given by option C and is equal to $90880.
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