Question

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,615,000. Harding paid $420,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $444,000; Building, $1,320,000 and Equipment, $876,000. (Round your intermediate percentages to the nearest whole number: i.e 0.054231 = 5%. Do not round any other intermediate calculations.)

Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,070,000 units over its 5-year useful life and has salvage value of $18,000. Harding produced 272,000 units with the equipment by the end of the first year of purchase.

Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year?

Answer 1

Using the units-of-production method,

Depreciation expense, year 1 = Equipment cost x (Units produced, year 1 / Total production over asset life)

= $876,000 x (272,000 / 1,070,000)

= $222,684.11 ~ $222,684

The production unit is a method for assessing the value of an asset over time. It becomes useful if the value of an asset is closer to its production unit than the number of years it is used.