Question

On May 5, 2017, Lloyd purchased a machine for $84,000. The estimated life of the machine was 10 years, with an estimated residual value of $10,000. The service life in terms of “output” is estimated at 8,000 hours of operation. Assume Lloyd uses the units-of-output method and that the machine was in operation for 1,000 hours in 2017 and 1,800 hours in 2018. The book value of the machine at December 31, 2018 is:

$48,100

$56,700

$25,900

$58,100

Answer 1

Given information

Purchase cost of the machine, May 5, 2017 = $84,000

Estimated life of the machine = 10 years

Estimated residual value = $10,000

Depreciable amount = Purchase cost of machine - Residual value = $84,000 - $10,000 = $74,000

Total output over the life of the machine = 8,000 hours

Output of operations in 2017 = 1,000 hours

Output of operations in 2018 = 1,800 hours

The company follows units-of-output method as the depreciation method.

Depreciation for 2017 = Depreciable amount x (Output of Hours used in 2017 / Total output of hours)

= $74,000 x (1,000 / 8,000) = $9,250.

Depreciation for 2018 = Depreciable amount x (Output of Hours used in 2018 / Total output of hours)

= $74,000 x (1,800 / 8,000) = $16,650

Book value of the machine at December 31, 2018 is = Cost of machine - Accumulated depreciation

Purchase cost of the machine = $84,000

Accumulated depreciation = $9,250 + $16,650 = $25,900

Book value of the machine at December 31, 2018 = $84,000 - $25,900 = $58,100.

Therefore the correct answer is $58,100.