Question

A company paid sales price of $200,000 to purchase equipment and $10,000 to have the equipment delivered to and installed in the company's production facilities on January 1, 2014. The sale tax for the purchase was $15k and $10k of maintenance expenses were incurred during the first year of operation. The estimated residual value of the equipment is $5,000. The equipment is expected to be used a total of 20,000 hours throughout its estimated useful life of five years. The company has a December 31, 2014 year-end and had used the equipment a total of 6,000 hours during 2014. Using the units- of- production method, what amount of depreciation expense would the company report for this equipment in the income statement prepared for the year-ended December 31, 2014?

If a company capitalizes costs that should have been expensed, how is its income statement for the current period impacted?
A. $66,000

B. $69,000

C. $58,500

D. $72,000

Answer 1

Part A:

Calculation of Depreciation Expense for year-ended Dec 31,2014

Cost of the Equipment as on jan 1,2014

Purchase cost = 200,000

Delivery & Installation costs = 10,000

Sales Taxes = 15,000

Cost of the Equipment = 225,000

Depreciation Expense as per units- of- production method = (225000-5000)*6000/20000 = $ 66,000

Part B:

Depreciation Expense if the company had capitalised the costs that should have been expensed

Costs of the Equipment if the company had capitalised the costs that should have been expensed = 225,000+10000

Costs of the Equipment = $ 235,000

Depreciation Expense = (235000-5000)*6000/20000 hrs = $ 69,000

Option B $ 69,000 is the answer.