Question

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $525,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $555,000; Building, $1,650,000 and Equipment, $1,095,000. (Round percentages to two decimal places: ie .054 = 5%).

Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,100,000 units over its 5-year useful life and has a salvage value of $18,000. Harding produced 275,000 units with the equipment by the end of the first year of purchase. Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year?

Multiple Choice

• $273,750

• $142,500

• $152,250

• $269,250

Answer 1

Percentage proportion of the appraisal value of the equipment over the total value

Percentage proportion of the Equipment = $1,095,000 / ($555,000 + $1,650,000 + $1,095,000)

= $1,095,000 / $3,300,000

= 0.3318 or

= 33%

Cost of the Equipment

Cost of the Equipment = Total purchase price x 33%

= $1,900,000 x 33%

= $627,000

Depreciation Expense for the first year for the Equipment under units-of-production method

Depreciation Expense for the first year = (Cost of the Equipment – Salvage value) x (Actual units / Estimated total units)

= ($627,000 - $18,000) x (275,000 units / 1,100,000 units)

= $152,250

Therefore, the depreciation expense for the equipment in the first year will be $152,250