Assume Lloyd uses the units-of-output method and that the machine was in operation for 1,000 hours in 2009 and 1,800 hours in 2010. The book value of the machine at December 31, 2010 is:
A) $48,100.
B) $58,100.
C) $25,900.
D) Some other amount.

Question

Quizplus · Accepted Answer

Under the units-of-output method, the depreciation cost per unit is calculated by taking the total cost of the machine and dividing it by the number of units it is expected to produce over its useful life. In this case, the machine was purchased for $95,000 and has an estimated production capacity of 500,000 units. Thus, the depreciation cost per unit is $0.19 ($95,000/500,000).

To calculate the depreciation expense for each year, Lloyd would multiply the number of units produced in the year by the depreciation cost per unit. In 2009, the machine produced 150,000 units (given in the question), so the depreciation expense for the year was $28,500 ($0.19 x 150,000). In 2010, the machine produced 300,000 units (1,800 hours x 1,000 units per hour), so the depreciation expense for that year was $57,000 ($0.19 x 300,000).

To find the book value of the machine at the end of 2010, we would subtract the accumulated depreciation (i.e. the total depreciation expense for the 2 years) from the original cost of the machine. The accumulated depreciation would be $85,500 ($28,500 + $57,000), so the book value at December 31, 2010 would be $9,500 ($95,000 - $85,500). Therefore, the correct choice is B ($58,100).

Assume Lloyd Uses the Units-Of-Output Method and That the Machine