Olivia company, whose reporting year ends on december 31st, purchased a vehicle for $50,000 on march 12th, 2018. the vehicle’s estimated useful life is five years, and it is expected to be driven 250,000 miles (70,000 miles in 2018 and 45,000 for each of the remaining four years). olivia estimated the salvage value at $5,000. using the units-of-activity method, what amount of depreciation expense should olivia record in year 2018?

$12,600

Explanation:

If Olivia Company uses the units of production depreciation method, we must calculate the depreciation cost per mile:

depreciation cost per mile = (purchase cost - salvage value) / total miles driven

depreciation cost per mile = ($50,000 - $5,000) / 250,000 miles

depreciation cost per mile = $45,000 / 250,000 = $0.18 per miles

Now we multiply by the total miles driven the first year times the depreciation cost per mile = 70,000 units x $0.18 per unit = $12,600

The correct answer is $12,600

The unit of production depreciation method is to determine the level at which value of assets has depreciated over time. The units of production depreciation enable company to determine the value of assets upon usage.

The depreciation cost per miles can be calculated by subtracting the purchased cost from the salvage value and divide the quotient by the total miles.  

This can be expressed as:

Depreciation cost per miles = (purchase cost - salvage value) / total miles driven

From the given question:

Substituting the value, then we have:

Depreciation cost = ($50,000 - $5,000) / 250,000 miles

= $45,000 / 250,000 miles

=$0.18 per miles

Recall the total miles driven in first year (2008) is 7000 miles; therefore, you have to multiply the value derived and the total mines driven in first year.

Therefore, you have:

7000 x 0.18  

= $12,600

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