A factory machine was purchased for P75,000 on January 1, 2008. It was estimated that it would have a P15,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2008. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2008 would be
Question
A factory machine was purchased for P75,000 on January 1, 2008. It was estimated that it would have a P15,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2008. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2008 would be
Solution
To calculate the depreciation expense using the units-of-activity method, follow these steps:
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Determine the depreciable cost: This is the original cost of the asset minus the salvage value. In this case, the depreciable cost is P75,000 - P15,000 = P60,000.
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Determine the depreciation rate per unit: This is the depreciable cost divided by the total estimated units of activity. In this case, the depreciation rate per unit is P60,000 / 40,000 hours = P1.5 per hour.
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Determine the depreciation expense: This is the depreciation rate per unit multiplied by the actual units of activity for the year. In this case, the depreciation expense is P1.5 per hour * 4,000 hours = P6,000.
So, the amount of depreciation expense for 2008 would be P6,000.
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