On December 27, 2014, Wolcott Windows purchased a piece of equipment for $107,500. The estimated useful life of the equipment is either three years or 60,000 units, with a residual value of $10,500. The company has a December 31 fiscal year end and normally uses straight-line depreciation. Management is considering the merits of using the units-of-production or diminishing-balance method of depreciation instead of the straight-line method. The actual numbers of units produced by the equipment were 10,000 in 2015, 20,000 in 2016, and 29,000 in 2017. The equipment was sold on January 5, 2018, for $15,000.
Instructions
(a) Calculate the depreciation for the equipment for 2015 to 2017 under
(1) The straight-line method;
(2) The diminishing-balance method, using a 40% rate; and
(3) Units-of-production. (Round the depreciable cost per unit to three decimal places.)
(b) Calculate the gain or loss on the sale of the equipment under each of the three methods.
(c) Calculate the total depreciation expense plus the loss on sale (or minus the gain on sale) under each of the three depreciation methods. Comment on your results.
Taking It Further
The owner of Wolcott Windows believes that having a gain or loss on sale indicates the company had made a mistake in calculating depreciation. Do you agree or disagree? Explain.