Activation Exercise 10-3: Units-of-Production Depreciation

Terms and Definitions

The costs of fixed assets should be recorded as depreciation expense over their useful lives. Three commonly used depreciation methods are (1) the straight-line method, (2) the units-of-production method, and (3) the double-declining balance method. The straight-line method will record amounts of depreciation expense than the double-declining balance method in the first year of an asset's useful life and amounts of depreciation expense than the double-declining balance method in the last year of an asset's useful life.

Understanding the Business Transaction

Depreciation expense measures . A company should record an expense for the cost of fixed assets . The units-of-production method provides for during each year of the asset's useful life.

Jasmine Company purchased equipment on January 1. 20X1. This is the only equipment that Jasmine company owns The following information relates to this equipment:

Initial cost	$273,156
Estimated residual value	$13,390
Expected useful life	10 years
Estimated hours of useful life	26,780 hours
Depreciation Method	Units-of-production
Hours operated during 20x1	2,260 hours
Hours operated during 20x2	1,840 hours

Jasmine Company would report $ of depreciation expense on its December 31, 20X1 income statement and $ of depreciation expense on its December 31, 20x2 income statement.

Recording in the Accounting System

Prepare the journal entry that Jasmine would make to record depreciation on December 31, 20x1:

Dec. 31

Prepare the journal entry that Jasmine would make to record depreciation on December 31, 20x2:

Dec. 31

Financial Statement Impact

Presley Company purchased equipment on January 1, 20x1. This is the only equipment that Presley company owns. The following information relates to this equipment:

Initial cost	$400,000
Estimated residual value	$40,000
Expected useful life	10 years
Depreciation Method	Units-of-production

Click here and use the sliders to select the (1) estimated hours of useful life and (2) hours operated to answer the following questions:

1.	Assume that the useful life of the equipment is 100,000 hours.

a.	Determine depreciation expense for the year ended December 31, 20x1. The equipment was operated for 4,500 hours.
	$

b.	Determine depreciation expense for the year ended December 31, 20x2. The equipment was operated for 4,000 hours.
	$

c.	The depreciation expense in 20x2 is the depreciation expense in 20x1.

d.	Determine the book value of the equipment that should be reported on the December 31, 20X1 balance sheet.
	$

e.	As the equipment is depreciated each year, the book value of the equipment that is reported on the balance sheet will .

2.	Assume that the useful life of the equipment is 125,000 hours.

a.	Determine depreciation expense for the year ended December 31, 20x1. The equipment was operated for 5,500 hours.
	$

b.	Determine depreciation expense for the year ended December 31, 20x2. The equipment was operated for 5,000 hours.
	$

c.	If the estimated residual value remains the same, an increase in the estimated hours of useful life of the equipment will result in depreciation expense per hour.

d.	Determine the book value of the equipment that should be reported on the December 31, 20X2 balance sheet.
	$

e.	If the estimated hours of useful life remains the same, an increase in the estimated residual value of the equipment will result in annual depreciation expense.