Question

Unlimited Airlines jet costs $ 40 comma 000 comma 000 and is expected to fly 400 comma 000 comma 000 miles during its 10​-year life. Residual value is expected to be zero because the plane was used when acquired. If the plane travels 25 comma 000 comma 000 miles the first​ year, how much depreciation should Unlimited Airlines record under the​ units-of-production method?

Answer 1

$2,500,000

Step-by-step explanation:

Depreciation is the charge of capital expense to the P&L due to the annual wear and tear of the asset.

Units of production method depreciate an expense on the basis of the production made within a period as a percentage of total capacity of the asset.

In this flying miles are considered to the the basis for the depreciation.

As per given data

Value of Jet = $40,000,000

Total Capacity = 400,000,000 miles

Depreciable value = Cost of the Jet - Residual Value = $40,000,000 - $0 = $40,000,000

Depreciation per mile = $40,000,000 / 400,000,000 = $0.1 per mile

Flying in the year = 25,000,000 miles

Depreciation for the year = 25,000,000 x $0.1 = $2,500,000