Question

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $2,565,000. Harding paid $770,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $814,000; Building, $2,420,000 and Equipment, $1,606,000. (Round your intermediate percentages to the nearest whole number: i.e 0.054231 = 5%. Do not round any other intermediate calculations.)

Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,170,000 units over its 5-year useful life and has salvage value of $19,000. Harding produced 282,000 units with the equipment by the end of the first year of purchase. Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year?

Multiple Choice

• $199,437

• $387,087

• $201,497

• $382,508

Answer 1

Solution:

% of purchase price attributable to equipment = Appraised value of equipment / Total appraised value of land, building and equipment

= $1,606,000 / ($814,000 + $2,420,000 + $1,606,000) =33%

Cost at which equipment to be recorded = $2,565,000*33% = $846,450

depreciation expense for the equipment in the first year = ($846,450 - $19,000) * 282000/1170000 = $199,437

Hence first option is correct.