Question

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 used straight-line detection. management us considering the merits of using the units of production or diminishing balance method of detection 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.
a) calculate the depreciation for the equipment for each year. under 1) the straight line method 2) the diminishing balance method using 40% rate and 3) units of production
d
b) calculate the gain or loss on the sale of equipment under each of the three methods l.
c) calculate the total depreciation expense plus the loss on sales ( minus the gain on sale) under each of the three depreciation methods. comment on your results

Answer 1

1. Straight line method :-

a) Depreciation = (107,500 - 10,500)/3

= 32,333 for each of 3 years (2015,2016 & 2017)

b) Gain or loss on the sale of equipment

Equipment value after 3 years = 107,500 - (32,333*3)

= 10500

Selling price of equipment = 15000

So, gain on sale of equipment = 4500 ( 15000-10500)

c) Total expense = 32333*3- 4500

= 92500

2. Units of production method :-

a) Depreciation = (107,500 -10,500)/60,000

=1.62 per unit

So, depreciation for 2015 = 16,200 (10,000*1.62)

depreciation for 2016 = 32,400 (20,000*1.62)

depreciation for 2017 = 46,980 (32,000*1.62)

b) Gain or loss on the sale of equipment

Remaining value of equipment = 107,500-16,200-32,400-46,980

=11,920

Selling price of equipment = 15000

So, profit on sale of equipment = 3,080 ( 15,000-11,920)

c) Total expense = Depreciation + Loss(gain) on sale of equipment

=95,580-3,080

=92,500

3. Diminishing Balance Method :-

a) Depreciation for year 2015 = 43,000 (107,500*40%)

  Depreciation for year 2016 = 25,800 ((107,500-43,000)*40%)

  Depreciation for year 2017 = 15,480 ((107,500-43,000-25,800)*40%)

b) Gain or loss on the sale of equipment

   Remaining value of equipment = 107,500-43,000-25,800-15,480

= 23,220

Selling price of equipment = 15000

So, loss on sale of equipment = 8,220 (15000-23,220)

c) Total expense = 84,280+8,220

= 92,500

Conclusion :- Straight line method is the best as profit on sale of equipment is highest.