ABC Company purchases equipment with a cost of $100,000. In addition, it pays $20,000 to install the equipment. The company expects to use the equipment for 10 years or 230,000 hours. At the end of its useful life, the equipment is expected to have a salvage value of $5,000. During the first year the equipment runs 25,000 hours and during the second year, the equipment is used for 23,500 hours. Determine the amount of depreciation for the first two years using Units of Production Depreciation method.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
ABC Company purchases equipment with a cost of $100,000. In addition, it pays $20,000 to install the equipment. The company expects to use the equipment for 10 years or 230,000 hours. At the end of its useful life, the equipment is expected to have a salvage value of $5,000. During the first year the equipment runs 25,000 hours and during the second year, the equipment is used for 23,500 hours.
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