40. If the asset is depreciated under the sum-of-the-years-digits method, the denominator of the depreciation rate...

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40. If the asset is depreciated under the sum-of-the-years-digits method, the denominator of the depreciation rate would be..

business accounting

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Solution

Q43. Depreciation rate under the units of production method:

Depreciation rate = depreciable base/estimated hours

Depreciable base = cost – residual value

Cost –

Purchase price $11,500

Transportation $500

Installation charges $1,500

Asset cost $13,500

Less: residual value $800

Depreciable base = $12,700

Estimated hours = 20,484 hours

Depreciation rate = $12,700/20,484 = $0.62 per hour

Hence the depreciation rate = $0.62 per hour

Q44. Depreciation for year when acquired on August 1 –

Depreciation expense = depreciation rate x hours of use

Hours of use = 2,500

Depreciation rate (computed above in Q43) = $0.62 per hour

Depreciation expense = $0.62 x 2,500 = $1,550

Depreciation expense = $1,550

Note: when depreciation expense is computed under units of production method, no significance is attached to the month of purchase of asset as the depreciation rate is computed based on estimated hours/(units).

Q45. Depreciation expense when machine is used for 3,000 hours –

Depreciation expense = depreciation rate x hours of use

= $0.62 x 3,000 = $1,860

Note: again since the depreciation rate is computed based on estimated hours, the useful life of asset is not considered and only the hours or use is needed to compute the depreciation expense.

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