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Units-of-Activity Depreciation

Brian Krogol
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Alright, so let's go ahead and follow this truck through its entire useful life using this units of production method. So I've got some of the data from above. And remember, we estimated we had an estimated useful life in this case, it's not in years, It's in miles, right? This is 100 and 20,000 miles. And we had figured out our rate per mile above which is the first step was going to be 0.33 repeating right? Three's forever per mile. So for each mile driven each year we're gonna take that much to appreciate. Now remember that the one trick here is that we have to find once we've used up the entire useful life because they use the useful life that we're depreciating over is 100 and 20,000 miles. So once we've gone through 100 20,000 miles, we don't take any more depreciation. So let's go ahead and start here in january 1st Year one. Well, that's when we bought the truck, We haven't driven it yet. Our net book value is going to be the entire value of the truck, which is the 42,000. Alright, Alright, that over here. 42,000, Cool. And then we calculated during year one, right? We already did Year one's calculation where we drove 36,000 miles times the 10.333 cents per mile. We got a depreciation expense of 12,000. Right, So this gave us accumulated depreciation of 12,000 and this brings our netbook value from 42,000 minus the 12,000 down to 30,000. Right? So let's keep on going here during year two? We drove it for 24,000 miles. So let's see what that comes out to 24,000 divided by three. Well, that's how I do it. 24,000 divided by three because really this is one third, Right? So that's another way to do it. But if you if you don't know if you can't deal with those fractions like that, you can just do times 10.33333. And you want to make sure you max out those threes and you're gonna round it here, you'll see your right at 8000. Right? So this is 24,000 times the rate of 0.33, repeating. And that will give us 8000 in depreciation expense for the second year notice. It's not going in any particular order. It just matters how many miles you drove it. Look in year three, we drove it more miles than in year two. So, it's not like it's gonna keep decreasing over time or increasing. It just matters how many miles we drove the truck. So in 8000, with 8000 in depreciation for year to our total accumulated depreciation is gonna increase To 20,000. Right? So, now we've got 42,000 minus the 20,000 accumulated, gets us to a value of 22,000 in netbook value. Cool. All right. What about in year three? So now year three, we drove it another 30,000 miles. Have we reached that estimated useful life yet? No, it doesn't look like it. It looks like we've still got some space. So we don't have to really worry about that just yet. So another 30,000 miles. So let's find out what that rate is gonna be 30,000 times 0.33 repeating. And that's gonna give us 10,000 in depreciation for year three. Right? So, if we do our previous accumulated depreciation of 20,000 plus another 10,000, well, that gets us to 30,000 in total accumulated depreciation. And it brings our net book value down to 12,012,000. So let's keep going here in year four. Well, why don't we calculate how many miles we've driven the truck just to make sure we're not gonna run out of miles here? 36,000 plus 24,000 plus 30,000. So, we've driven the truck 90,000 miles after three years. So, we have another 30,000. Right? Our total estimated useful life is 120,000 miles. And that's what we're that's what we are depreciating this truck over is the 120,000 miles. So we just want to make sure we don't go over that amount. So in year four, we've got space for that. Let's do the entire 18,000 here 18,000 times 0.33 repeating. And that gives us 18,000 divided by three really is 6000. Cool. So 6000 isn't is added to our accumulated depreciation plus 6000 Is equal to 36,000. There we go. Alright, so now let's see what our remaining net book value is. And we're left with 6000 in remaining netbook value. And we're trying to get to an estimated residual value of 2000. Right? So we are getting pretty close to to running out of miles here in our estimated useful life. So let's go ahead and remember this estimated useful life. It's just an estimate. It might last longer, it might last shorter. So we just want to make sure that we depreciate only over that estimate that we made. So 36 plus 24 plus 30 plus the 18 from year four gets us to 100 and 8000 miles. We've already driven it 108,000 miles before we get to Year five. So how many miles are left in its estimated useful life? There's only 12,000 left, right, 120,000 minus the 108 that we've driven from these four years. We had already driven 100 8000 miles. Well, there's only 12,000 miles left, but in year five we drove it 16,000. So are we gonna multiply 16,000 times 0.33. No, no, no. We can only depreciate it with the amount of miles left in its estimated useful life. If we use the whole 16,000, what we would go under the residual value and we don't want to do that. So all we're gonna do is we're gonna depreciate it for the 12,000 miles left in its useful life Times 2.333. And that's gonna give us 4000 in depreciation. And that gets us to 36,000. Look at, look what happens in our accumulated depreciation, It equals 40,000. Remember that our depreciation base, that's the 42,000 minus the 2000. So the total amount of depreciation we can take is 40,000. Okay, and that's exactly what's happened here when we reduced it in year five. So actually I'm gonna write this 12,000 in a different color. So that it stands out a little bit because we used a little bit of math to get to that 12,000. Okay, so we want to make sure that our total depreciation is equal to our depreciation base of 40,000. And then what's gonna be left in our net book value? Well, just our residual value. Right, so 42,000-40,000 gets us to 2000. Now, what about in year six when we continue to drive the truck for another 8000 miles? Well, we've already fully depreciated. We're not gonna take any more depreciation expense are accumulated depreciation, still 40,000 on our books and our net book value is still going to be the 2000 in residual value there. Cool. Alright. So now that you guys have seen the units of production method, why don't you guys try some practice problems? Alright, let's do that now.