Question

On January 2, 2016 McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. What is the amount of depreciation expense for 2017, if McNally's Extra Corporation uses the asset 4,000 hours and uses the units-of-production method of depreciation?

a) $30,000
b) $20,000
c) $25,000
d) $24,000

Answer 1

To determine the depreciation expense for McNally's Extra Corporation using the units-of-production method: subtract the residual value from the equipment cost, divide by total expected production units to find per unit depreciation, and multiply by units used in 2017. The calculation results in a depreciation expense of $20,000 for the year 2017.

Step-by-step explanation:

To calculate the depreciation expense for 2017 using the units-of-production method, we need to follow these steps:

1. Find the depreciation per unit by subtracting the residual value from the cost of the equipment and then dividing by the total number of units of production expected over the asset's life (in this case, the number of hours).
2. Multiply the depreciation per unit by the number of units (hours) used during the year to find the depreciation expense for that year.

Let's go through the calculation:

1. Depreciation per hour = (Cost of Equipment - Residual Value) / Total Expected Hours
= ($120,000 - $20,000) / 20,000 hours
= $100,000 / 20,000 hours
= $5 per hour

2. Depreciation expense for 2017 = Depreciation per hour × Hours used in 2017
= $5 per hour × 4,000 hours
= $20,000

Therefore, the depreciation expense for 2017 is $20,000 (Option b).