Perry CO which uses the units of production method of depreciation acquired equipment for $70,000. Management is considering two ways to record the depreciation: based on machine hours, estimated at 11,000 or based on units produced, estimated at 16,000.

If the equipment has a residual (salvage) value of $2,000, what is the depreciation rate if the company decides to use units as the unit of measure?

The depreciation rate per unit would be found as follows:

The first step, before we deprecate is to find the depreciable base:

$79,000 Original Cost - $2,000 Residual Value = $77,000

To compute based on units prodcued:

_______$77,000______ = **$4.8125 (per unit) depreciation rate**

16,000 (units)

Hours used is an example of a unit of measure under the Units of Production method of depreciation.

True or False

True.

For most assets, units of production (UOP) are measured in a number of ways including:

**Labor or machine hours (hours used)**- Units produced
- Miles driven (usually only for vehicles)

Under the Units of Production method, the estimated useful life in years is irrelevant

True or False

True.

_______ must select the appropriate category to use throughout the asset life.

Management

On August 1st, 20x0, your company which uses UOP depreciation, purchases for $200,000 a machine with a useful life of 2,000,000 units and a residual value of $10,000. In 20x1, the machine produced 110,000 units and 160,000 units in 20x2.

What is the balance in the Accumulated Depreciation account at the end of 20x2?

Under the units of production method, the first step to calculate the depreciable rate is to determine the depreciable base.

Step 1: Cost - Residual (Salvage) Value = Depreciable Base

$200,000 - $10,000 = $190,000

__$190,000__ = 0.095 depreciation rate per unit

2,000,000

Year 1 depreciation expense: 110,000 units x $0.095 depreciation rate = $10,450

Year 2 depreciation expense: 160,000 units x $0.095 depreciation rate = $15,200

**As of year 2, total accumulated depreciation is $25,650 ($10,450 + $15,200)**

Vehicle Cost = $25,000

Salvage Value = $1,000

Useful life Years = 6 years

Useful life Units = 120,000 miles

Year 1 - 30,000 miles

Calculate depreciation using the straight-line method.

Cost - Residual (Salvage) value = Depreciable Base

$25,000 - $1,000 = $24,000

24,000/6 years = **$4,000 **depreciation expense per year

Please note, the other information (useful life in units and Year 1) is irrelevant under the straight-line method.

If a company has an asset that they use for both manufacturing and nonmanufacturing purposes, omitting the numbers, what would be the journal entry?

Depreciation Expense (DR.) **(portion used for nonmanufacturing purposes)**

Inventory - Work in Process Overhead (DR.) **(portion used for manufacturing purposes)**

Accumulated Depreciation (CR.)

What is the journal entry for depreciation expense when using the units of production method?

Recording depreciation expense under the units of production method is the same as it would be for any other method.

__Journal Entry__

Depreciation Expense (DR.)

Accumulated Depreciation (CR.)

In the formula for units of production method, what number is reflected in the denominator?

__Numerator__

**Denominator**

In the units of production formula, the number in the denominator of the formula represents the estimated life in units which is the base to determine the depreciation rate per unit of measure.

For example, if an asset has a depreciable base of $5,000 and the estimated unit of measure is 5,000 units. For every unit produced, the company will recognize depreciation at a rate of $1 per unit produced.

__ Depreciable base** __

Estimated life (in units, hours, miles etc;)

Perry CO which uses the units of production method of depreciation acquired equipment for $70,000. Management is considering two ways to record the depreciation: based on machine hours, estimated at 11,000 or based on units produced, estimated at 16,000.

If the equipment has a residual (salvage) value of $2,000, what is the depreciation rate if the company decides to use hours as the unit of measure?

The depreciation rate per hour would be found as follows:

The first step, before we deprecate is to find the depreciable base:

$79,000 Original Cost - $2,000 Residual Value = $77,000

To compute based on hours used:

_______$77,000______ = **$7 (per hour) depreciation rate**

11,000 (hours)

Under the units of production method, an asset’s cost is depreciated, 'spread out,' based on

Under the units of production method, an asset’s cost is depreciated, 'spread out,' based on how many units it produces or how many hours it is used, or any other unit of measure as opposed to the number of years the asset is in service.

Total depreciation over an asset's life is the same under units of production and declining balance method.

True or False

**True.**

With no regard to which depreciation method is the chosen, the maximum amount of depreciation that can be taken for an asset is equal to the depreciable base.

Machine Cost = $35,000

Salvage Value = $5,000

Useful life Years = 4 years

Useful life Units = 10,000 units

Year 1 - 1,100 units

Calculate depreciation using the units of productions method.

$35,000 - $5,000 = $30,000 depreciable base

__ $30,000__ = $3 per unit produced (depreciation rate)

10,000

Year 1 Depreciation Expense = Units produced x Depreciation Rate

1,100 units x $3 per unit = **$3,300**

Under the Units of Production method, If an asset was purchased on January 1st and produced 24,000 units in the first year, depreciation expense would be the same whether all units are produced at January 1, August 1 or December 31 or at any time during the year,

True or False

**True.**

Under UOP, depreciation is not measured by the number of years that the asset is used, therefore when the asset is placed in service in the first year is irrelevant.

In the formula for units of production method, what number is reflected in the numerator?

__Numerator__

Denominator

In the units of production formula, the number in the numerator of the formula represents the depreciable base** which is depreciated (allocated, spread out) by the estimated useful life in units (units, hours, miles)

__ Depreciable base** __

Estimated life (in units, hours, miles etc;)

Under the units of production method of depreciation, the unit of measure might be:

###
- Units produced
- Miles driven (usually only for vehicles)
- Labor or machine hours (hours used)

Machine Cost = $35,000

Salvage Value = $5,000

Useful life Years = 4 years

Useful life Units = 10,000 units

Year 1 - 1,100 units

Calculate depreciation using the straight-line method.

$35,000 - $5,000 = $30,000 depreciable base

__$30,000__ = $7,500 depreciation expense per year

4

The formula for Units of Production method of depreciation is:

__ Depreciable base** __ = **depreciation rate**

Estimated life (units, miles, hours)

**depreciation rate **x output for year = annual depreciation

Under the units of production method, the same amount of annual depreciation is recognized every year.

True or False

**False.**

Under the units of the production method, the depreciation expense will fluctuate unless the asset produces units in an even manner every year. For example, a company purchased a vehicle it expects to drive 20,000 miles, maximum per year. If in total, management estimates the asset will last 100,000 miles, based on the estimated usage, the car will be fully depreciated in 5 years. In a scenario as such where there will be an even amount of production expected, it would be best to use the straight-line method.

Under this method of accounting, depreciation is measured by the output of production, not the number of years that the asset will be used.

Units of Production