On January 1, Year 1, Milton Manufacturing Company purchased equipment with a list price of $31,000. A total of $2,800 was paid for installation and testing. During the first year, Milton paid $4,200 for insurance on the equipment and another $640 for routine maintenance and repairs. Milton uses the units-of-production method of depreciation. Useful life is estimated at 100,000 units, and estimated salvage value is $5,600. During Year 1, the equipment produced 14,000 units. What is the amount of depreciation for Year 1

the amount of depreciation for Year 1 is $3,948

Explanation:

Step 1 : Determine Cost of Equipment

Cost according to IAS 16 means purchase price plus other costs directly incurred in bringing the asset to location and condition of use as intended by management.

Purchase Price                        $31,000

Installation and testing            $2,800

Total Cost                              $ 33,800

Step 2 : Determine the depletion rate

Depletion rate = (Cost - Salvage Value) ÷ Estimated Production

                        = ($ 33,800 - $5,600) ÷ 100,000 units

                        = 0.282

Step 3 : Determine the Depreciation Expense

Depreciation Expense =  Depletion rate x Units Produced

                                     =  0.282 x 14,000 units

                                     = $3,948

Conclusion

the amount of depreciation for Year 1 is $3,948