How to Calculate Depreciation Expense Using Units-of-Activity Method
Annual depreciation = [(original cost - salvage value) / useful life of production in miles] * miles driven
Understanding the Units-of-Activity Method
The units-of-activity method is a depreciation technique that allocates the cost of an asset over its useful life based on the total number of units the asset is expected to produce or the total activity it will perform. This method is ideal for assets like vehicles, machinery, or equipment that wear out with usage.
Calculation of Depreciation Expense
Using the provided example data:
- Purchasing price = $143,000
- Useful life in miles = 1,000,000
- Salvage value = $15,000
- Miles driven in the first year = 78,000
Let's plug these values into the formula:
Annual depreciation = [(143,000 - 15,000) / 1,000,000] * 78,000
Annual depreciation = (128,000 / 1,000,000) * 78,000
Annual depreciation = 0.128 * 78,000
Annual depreciation = $9,984
Therefore, Teal Mountain Inc. should record a depreciation expense of $9,984 for the first year of driving the truck 78,000 miles using the units-of-activity method.