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Computing and Recording Units-of-Production Depreciation

Problem 6-27 Computing and recording units- of- production depreciation

Brees Corporation purchased a delivery van for $ 35,500 in 2010. The firm's financial condition immediately prior to the purchase is shown in the following horizontal statements model.

Cash + Van - acct depreciation = common stock + Retained Earnings
$50,000 + NA - NA = 50,000 + NA
The van was expected to have a useful life of 150,000 miles and a salvage value of $ 5,500. Actual mileage was as follows.
2010 50,000
2011 70,000
2012 58,000
a. Compute the depreciation for each of the three years, assuming the use of units- of- production depreciation.
b. Assume that Brees earns $ 21,000 of cash revenue during 2010. Record the purchase of the van and the recognition of the revenue and the depreciation expense for the first year in a financial statements model like the preceding one.
c. Assume that Brees sold the van at the end of the third year for $ 4,000. Calculate the amount of gain or lose from the sale.

Solution Preview

a. In units of production, depreciation = Units X depreciation per unit
Depreciation per unit = (Cost - salvage value)/total expected units over the life
In this question
depreciation per mile = (35,500-5,500)/150,000 miles = $0.2 per mile
Depreciation in 2010 = 50,000 miles X 0.2 = $10,000
Depreciation in 2011 = ...

Solution Summary

The solution computes and records unit-of-production depreciation.