Question

Roland Limited acquired an item of plant with an expected useful life of ...

Roland Limited acquired an item of plant with an expected useful life of 5years. Expected total production output over this period was: Year 1, 40 000 units; Year 2, 40000 units; Year 3, 32000 units; Year 4, 28000 units Year 5, 15 000 units. The plant cost $200000 and associated installation costs amounted to $50000 and residual value is $20 000. The amount of depreciation charged in the first year is:

Select one:

a. $57 500

b. $62 500

c. $67 500

d. $92 000

Answer 1

Value of the plant = (plant cost + associated installation cost) - residual value

= ($200,000 + $50,000) - $20,000

= $230,000

Total expected units to be produced in 5 years = 40,000+40,000+32,000+28,000+15,000

= 155,000 units

Units expected to be produced in year 1 = 40,000 units

So, depreciation in year 1

= (units expected to be produced in year 1 / total expected units to be produced in 5 year) * cost of plant

= (40,000 / 155,000) * $230,000

= 0.25 * $230,000

= $57,500