Harding Corporation acquired real estate that contained land, building and equip

Question

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $2,850,000. Harding paid $875,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $925,000; Building, $2,750,000 and Equipment, $1,825,000. (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 1,200,000 units over its 5-year useful life and has salvage value of $19,000. Harding produced 285,000 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 $428.925 $433.438 $225,625 $218.856

Explanation / Answer

Correct answer is A

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In Units of production method depreciation is charged as per the asset use, more depreciation is charged if asset is used more in a year and vice versa.                                                                                        

The formula to calculate annual depreciation is,

Annual depreciation = [Units produced in year/ Life of asset in Units]* (Asset Cost - Salvage value)

Let’s put the values in the formula,       

= (285000/1200000)* (1825000 - 19000)

= (0.2375) * (1806000)                                                                                                                                                                  

= 428925                                                                                                                                                                            

Year 1 Depreciation is $428925                                                                                                                                                  

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