Section 4 - Units of Production Method Flashcards
To ensure students understand how to calculate depreciation using the Units of Production method.
Perry CO which uses the units of production method of depreciation acquired equipment for $70,000. Management is considering two ways to record the depreciation: based on machine hours, estimated at 11,000 or based on units produced, estimated at 16,000.
If the equipment has a residual (salvage) value of $2,000, what is the depreciation rate if the company decides to use units as the unit of measure?
The depreciation rate per unit would be found as follows:
The first step, before we deprecate is to find the depreciable base:
$79,000 Original Cost - $2,000 Residual Value = $77,000
To compute based on units prodcued:
_______$77,000______ = $4.8125 (per unit) depreciation rate
16,000 (units)
Hours used is an example of a unit of measure under the Units of Production method of depreciation.
True or False
True.
For most assets, units of production (UOP) are measured in a number of ways including:
- Labor or machine hours (hours used)
- Units produced
- Miles driven (usually only for vehicles)
Under the Units of Production method, the estimated useful life in years is irrelevant
True or False
True.
_______ must select the appropriate category to use throughout the asset life.
Management
On August 1st, 20x0, your company which uses UOP depreciation, purchases for $200,000 a machine with a useful life of 2,000,000 units and a residual value of $10,000. In 20x1, the machine produced 110,000 units and 160,000 units in 20x2.
What is the balance in the Accumulated Depreciation account at the end of 20x2?
Under the units of production method, the first step to calculate the depreciable rate is to determine the depreciable base.
Step 1: Cost - Residual (Salvage) Value = Depreciable Base
$200,000 - $10,000 = $190,000
$190,000 = 0.095 depreciation rate per unit
2,000,000
Year 1 depreciation expense: 110,000 units x $0.095 depreciation rate = $10,450
Year 2 depreciation expense: 160,000 units x $0.095 depreciation rate = $15,200
As of year 2, total accumulated depreciation is $25,650 ($10,450 + $15,200)
Vehicle Cost = $25,000
Salvage Value = $1,000
Useful life Years = 6 years
Useful life Units = 120,000 miles
Year 1 - 30,000 miles
Calculate depreciation using the straight-line method.
Cost - Residual (Salvage) value = Depreciable Base
$25,000 - $1,000 = $24,000
24,000/6 years = $4,000 depreciation expense per year
Please note, the other information (useful life in units and Year 1) is irrelevant under the straight-line method.
If a company has an asset that they use for both manufacturing and nonmanufacturing purposes, omitting the numbers, what would be the journal entry?
Depreciation Expense (DR.) (portion used for nonmanufacturing purposes)
Inventory - Work in Process Overhead (DR.) (portion used for manufacturing purposes)
Accumulated Depreciation (CR.)
What is the journal entry for depreciation expense when using the units of production method?
Recording depreciation expense under the units of production method is the same as it would be for any other method.
Journal Entry
Depreciation Expense (DR.)
Accumulated Depreciation (CR.)
In the formula for units of production method, what number is reflected in the denominator?
Numerator
Denominator
In the units of production formula, the number in the denominator of the formula represents the estimated life in units which is the base to determine the depreciation rate per unit of measure.
For example, if an asset has a depreciable base of $5,000 and the estimated unit of measure is 5,000 units. For every unit produced, the company will recognize depreciation at a rate of $1 per unit produced.
Depreciable base**
Estimated life (in units, hours, miles etc;)
Perry CO which uses the units of production method of depreciation acquired equipment for $70,000. Management is considering two ways to record the depreciation: based on machine hours, estimated at 11,000 or based on units produced, estimated at 16,000.
If the equipment has a residual (salvage) value of $2,000, what is the depreciation rate if the company decides to use hours as the unit of measure?
The depreciation rate per hour would be found as follows:
The first step, before we deprecate is to find the depreciable base:
$79,000 Original Cost - $2,000 Residual Value = $77,000
To compute based on hours used:
_______$77,000______ = $7 (per hour) depreciation rate
11,000 (hours)
Under the units of production method, an asset’s cost is depreciated, ‘spread out,’ based on
Under the units of production method, an asset’s cost is depreciated, ‘spread out,’ based on how many units it produces or how many hours it is used, or any other unit of measure as opposed to the number of years the asset is in service.
Total depreciation over an asset’s life is the same under units of production and declining balance method.
True or False
True.
With no regard to which depreciation method is the chosen, the maximum amount of depreciation that can be taken for an asset is equal to the depreciable base.
Machine Cost = $35,000
Salvage Value = $5,000
Useful life Years = 4 years
Useful life Units = 10,000 units
Year 1 - 1,100 units
Calculate depreciation using the units of productions method.
$35,000 - $5,000 = $30,000 depreciable base
$30,000 = $3 per unit produced (depreciation rate)
10,000
Year 1 Depreciation Expense = Units produced x Depreciation Rate
1,100 units x $3 per unit = $3,300
Under the Units of Production method, If an asset was purchased on January 1st and produced 24,000 units in the first year, depreciation expense would be the same whether all units are produced at January 1, August 1 or December 31 or at any time during the year,
True or False
True.
Under UOP, depreciation is not measured by the number of years that the asset is used, therefore when the asset is placed in service in the first year is irrelevant.
In the formula for units of production method, what number is reflected in the numerator?
Numerator
Denominator
In the units of production formula, the number in the numerator of the formula represents the depreciable base** which is depreciated (allocated, spread out) by the estimated useful life in units (units, hours, miles)
Depreciable base**
Estimated life (in units, hours, miles etc;)
