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Units-of-Activity Depreciation

Brian Krogol
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Alright let's try this example on january 1st year one, johnson and johnson and johnson company purchased a delivery truck for $42,000 the company estimated a useful life of 100 and 20,000 miles. So notice are useful life is in miles now, not in years And a residual value of 2000. So we think after 100 and 20,000 miles while this truck's not gonna work anymore during year one, the truck was driven 36,000 miles. Okay, so that's that tells us how much depreciation we're going to take in the first year, is how many units we've driven? So what would be the entry to record depreciation when preparing the year one financial statements and the netbook value on that date. Okay. So it has to give you this information of how many units we used up during the year. Alright. So the first thing we wanna do is calculate our depreciation per unit. So what we have is our cost of 42,000 -2000. Right? So let's do depreciation per unit and that's gonna equal are 42,000 minus our residual value of 2000. And we're gonna divide that by are useful life of 100 and 20,000 units. So 40,000 Divided by 120,000, that's gonna equal 0.33333. Right? Forever. So you want to be careful because if you rounded that off 2.33, it might not give you the same answer as if you put in a lot of threes. So I'm always paranoid and when I put it in my calculator, especially on a test. I don't want to get something wrong, I'll jam that three button. I'll fill that calculator with threes until there's no more space left, and then I'll do my multiplication. Alright, so let's go ahead and let's find our depreciation expense for year one. So in year one, in year one, our depreciation expense. Well, we know our depreciation per unit, right? This is gonna be per unit. Well, in this case it's per mile driven, right? So for each mile driven we're gonna take .3333. And let's see what that gives us. So I'm gonna pull up my calculator and I'm gonna press 0.3 until I can't press the three anymore. And then I'm gonna multiply that by 36,000 And there we go. Now I can round it. Now I feel safe rounding after the fact. So it looks like it's gonna be 12,000 in depreciation the first year. Right? So this is our depreciation expense. We found it. Now we're talking about, this is $12,000 of depreciation, right? This was 30 33 cents per unit here, but this was 36,000 miles driven, right? We drove 36,000 miles during the first year. And at that rate of 33.3 33 cents per unit. We got 12,000 in depreciation expense. So the depreciation expense. Well, that entry always looks the same. No matter what, No matter what method we're using for depreciation. It's always gonna look like this debit depreciation expense, credit accumulated Q accumulated depreciation. Okay. And that's gonna be in this case 12,000 As our debit. 12,000 as our credit, right? We debit the expense and credit accumulated depreciation. So there we go. That is going to be our entry to record depreciation. So all we need to do is find our netbook value. Now remember netbook value, that's just the cost, what we paid for it minus all the depreciation to date minus all accumulate, right? All the accumulated depreciation. So let's do that over here. Netbook value, it's gonna equal our cost of 42,000 minus our accumulated depreciation, which to this point was just 12,000. And our net book value would be 30,000 at the end of the first year. Okay, so there there it is our depreciation expense entry and our net book value. So this entry, this method is not so tough because what you do is after you found this rate, which is what you do in the first step. Well then all you need to do is find each year's number of miles. And you're just gonna keep multiplying it by the rate. And there you go. That'll give you your depreciation expense each year, and they're gonna have to give you that information. They're gonna have to tell you how many miles you drove each year. All right, so let's go at the bottom of the page, I've got another little table where we're gonna follow this truck through its entire useful life using this units of production method. Alright, let's do that in the next video.