Question

A piece of manufacturing equipment was purchased at the beginning of 2021 for an original cost of $50,000. Over it's useful life, the equipment is expected to produce 40,000 widgets as follows:

2021: 4,000 units
2022: 10,000 units
2023: 12,000 units
2024: 8,000 units
2025: 6,000 units

The asset can be salvaged for 10% of its original cost at the end of 2025. The usage of the asset varies over time and is dependent on the output. What is depreciation expense for 2025?

Answer 1

Answer:

According to the question, we have to find the Depreciation Expense that will be charged over fixed assets till 2025, starting from 2021.

Explanation:

Prior to calculating the value of depreciation expense, we must know about  some basic terms.

• Depreciation Expense: It is basically the expenses that are charged to fixed assets, basis being how much quantity of that asset can be consumed during the accounting period.
• Useful Life: The time until when the asset can be consumed or function properly.
• Salvage Value: The price at which the asset can be sold after it's useful life.
• Cost Of Asset: It basically includes taxes, shipping expenses and setup expenses.

Now, coming to the question, we have all the values already given.

Useful Life = 2025-2021 = 4 year

Cost Of Asset = $50,000

Salvage Value = 10% of original cost = 10% of $50,000

                         = $5000

Hence, the formula for calculating Depreciation Expense =

= (Original Cost Of Asset - Salvage Value) / Useful Life

Hence, putting the values:

= ($50,000 - $5,000) / 4

= $45,000 / 4

= $11,250

Hence, the calculated depreciation expenses upto 2025 will be $11,250.

Answer 2

Answer:$6750

Explanation: Since the number of units produced varies each year, we cannot use the straight line approach for this. The correct approach is the 'unit of production method' the formula to is

(cost - salvage value) * (number of units produced per year/no of units produced in it's entire lifetime)

So the depreciation expense is calculated as follows:

cost = $50000

salvage value = 0.1 * 50000 = $5000

cost - salvage value = 45000

no of units produced in it's entire lifetime = 40000

year 1(2021): 45000*(4000/40000) = $4500

year 2(2022): 45000*(10000/40000) = $11 250

year 3(2023): 45000*(12000/40000) = $13500

year 4(2024): 45000*(8000/40000) = $9000

year 5(2025): 45000*(6000/40000) = $6750

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Total:                                                            $45000

Note: Year 1 to 4 calculation provided for explanatory purpose only, you can jump straight to year 5 and calculate the depreciation expense for that only.