Mohr Company purchases a machine at the beginning of the year at a cost of $46,000. The machine is depreciated using the units-of-production method. The company estimates it will use the machine for 5 years, during which time it anticipates producing 84,000 units. The machine is estimated to have a $4,000 salvage value. The company produces 10,800 units in year 1 and 7,800 units in year 2. Depreciation expense in year 2 is:Multiple Choice$18,400.$27,600.$4,000.$3,900.$8,400.
Question
Mohr Company purchases a machine at the beginning of the year at a cost of 4,000 salvage value. The company produces 10,800 units in year 1 and 7,800 units in year 2. Depreciation expense in year 2 is:Multiple Choice27,600.3,900.$8,400.
Solution
To calculate the depreciation expense in year 2 using the units-of-production method, we first need to determine the depreciation rate per unit.
Step 1: Calculate the total depreciable cost. This is the cost of the machine minus the salvage value. Total depreciable cost = 4,000 = $42,000
Step 2: Calculate the depreciation rate per unit. This is the total depreciable cost divided by the total estimated units the machine will produce over its lifetime. Depreciation rate per unit = 0.50 per unit
Step 3: Calculate the depreciation expense for year 2. This is the depreciation rate per unit multiplied by the number of units produced in year 2. Depreciation expense in year 2 = 3,900
So, the depreciation expense in year 2 is $3,900.
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