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On January 1, Busy Beaver bought a new industrial lathe for $210,000. It expects to use the lathe for 10,000 hours over the next 5 years and then sell it for $10,000. Busy Beaver used the lathe for 2,000 hours in its 1st year and 2,500 hours in its 2nd year. Using units-of-production, Depreciation Expense will be ______.

A) $42,000
B) $52,500
C) $21,000
D) $26,250

Answer :

Final answer:

The depreciation expense for the 1st year under the units-of-production method is $40,000 and for the 2nd year it is $50,000. The options provided in the question are incorrect.

Explanation:

To calculate depreciation expense using the units-of-production method, the first step is to determine the depreciable cost. This is equal to the cost of the asset minus the salvage value ($210,000-$10,000 = $200,000). Next, we find the depreciation per unit, which is the depreciable cost divided by the total expected units of production ($200,000 ÷ 10,000 hours = $20/per hour). Hence, the depreciation expense for the 1st year is 2000 hours * $20 = $40,000 and for the 2nd year, it is 2500 hours * $20 = $50,000. So, neither of the options a) $42,000 b) $52,500 c) $21,000 d) $26,250 are correct.

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