Question

Gerald Gumbo owns Cajun Chili Corporation. Gerald has asked you to estimate depreclation for the next two years, so he can decide which method to use. The company purchased a new giant chili kettle on January 1 , 2018 at a cost of $160,000. The company estimates that the kettle will have a salvage value of $40,000. The chili kettle is expected to produce 10,000 batches of chili during its 4 -year estimated useful life, including 2,000 batches in 2018 and 3,000 batches in 2019. What is depreciation expense for 2019 using the units of activity method?

Answer 1

The depreciation expense for 2019 is $36,000, calculated by multiplying the depreciation rate per unit ($12) by the number of batches produced in 2019 (3,000 batches).

Step-by-step explanation:

The depreciation expense for 2019 using the units of activity method can be calculated as follows:

• Determine the depreciable base by subtracting the salvage value from the cost of the chili kettle: $160,000 - $40,000 = $120,000.
• Calculate the depreciation per unit by dividing the depreciable base by the total units of activity expected over the useful life: $120,000 ÷ 10,000 batches = $12 per batch.
• Multiply the depreciation per unit by the number of batches produced in 2019: $12 x 3,000 batches = $36,000 depreciation expense for 2019.

This method reflects the wear and tear on the chili kettle based on how much it's used rather than simply the passage of time.