A machine with a cost of Sh 205,000 has an estimated salvage value of Sh 15,000 and an estimated useful life of 20 years or 9,500 hours. It is to be depreciated using the units-of-activity method of depreciation. (a) The rate of depreciation is Sh per hour. (b) The amount of depreciation for the second full year, during which the machine was used for 5,000 hours is Sh
Question
A machine with a cost of Sh 205,000 has an estimated salvage value of Sh 15,000 and an estimated useful life of 20 years or 9,500 hours. It is to be depreciated using the units-of-activity method of depreciation.
(a) The rate of depreciation is Sh per hour.
(b) The amount of depreciation for the second full year, during which the machine was used for 5,000 hours is Sh
Solution
(a) To calculate the rate of depreciation per hour using the units-of-activity method, you first need to determine the depreciable cost of the machine. This is done by subtracting the salvage value from the initial cost of the machine.
Depreciable cost = Initial cost - Salvage value Depreciable cost = Sh 205,000 - Sh 15,000 = Sh 190,000
Next, divide the depreciable cost by the total number of estimated hours of use.
Depreciation rate per hour = Depreciable cost / Total hours of use Depreciation rate per hour = Sh 190,000 / 9,500 hours = Sh 20 per hour
(b) To calculate the amount of depreciation for the second full year, you multiply the depreciation rate per hour by the number of hours the machine was used in that year.
Depreciation for the second year = Depreciation rate per hour * Hours used Depreciation for the second year = Sh 20 per hour * 5,000 hours = Sh 100,000
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