A factory machine was purchased for $20,000 on March 1, 2014. It was estimated that it would have a $4,000 residual value at the end of its 5-year useful life. It was also estimated that the machine would be run 25,000 hours in the 5 years. If the actual number of machine hours run in 2014 was 4,000 hours and the company uses the units-of-production method of depreciation, the amount of depreciation expense for 2014 would be
A) $2,133.
B) $2,560.
C) $3,200.
D) $4,000.

Question

Quizplus · Accepted Answer

The units-of-production method calculates depreciation based on the actual usage of the asset. The depreciation per hour is calculated as (Cost - Residual Value) / Total Estimated Hours = ($20,000 - $4,000) / 25,000 hours = $0.64 per hour. For 4,000 hours of use in 2014, the depreciation expense is 4,000 hours * $0.64 per hour = $2,560.

A Factory Machine Was Purchased for $20,000 on March 1