On January 3, 2020, Ajax Argyle purchased a piece of equipment for $125,000. The equipment’s estimated useful life is either three years or 12,000 units, with a residual value of $18,000. 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 6,000 in 2020, 2,000 in 2021, and 3,800 in 2022. The equipment was sold on January 5, 2023, for $21,000.

Instructions

a. Calculate the depreciation for the equipment for 2020 to 2022 under (1) the straight-line method; (2) the diminishing-balance method, using a 45% rate; and (3) units of-production. Round the straight-line depreciation rate and 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.

The owner of Ajax Argyle 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.