Unlimited Airlines jet costs $ 40 comma 000 comma 000 and is expected to fly 400 comma 000 comma 000 miles during its 10-year life. Residual value is expected to be zero because the plane was used when acquired. If the plane travels 25 comma 000 comma 000 miles the first year, how much depreciation should Unlimited Airlines record under the units-of-production method?

$2,500,000

Explanation:

Depreciation is the charge of capital expense to the P&L due to the annual wear and tear of the asset.

Units of production method depreciate an expense on the basis of the production made within a period as a percentage of total capacity of the asset.

In this flying miles are considered to the the basis for the depreciation.

As per given data

Value of Jet = $40,000,000

Total Capacity = 400,000,000 miles

Depreciable value = Cost of the Jet - Residual Value = $40,000,000 - $0 = $40,000,000

Depreciation per mile = $40,000,000 / 400,000,000 = $0.1 per mile

Flying in the year = 25,000,000 miles

Depreciation for the year = 25,000,000 x $0.1 = $2,500,000