Question

Sean Ltd. follows a policy of a 10% depreciation charge per year on machinery and a 5% depreciation charge per year on buildings.

The following transactions occurred in 2017:

March 31, 2017       A warehouse which Sean had purchased on January 1, 2005 for $1.7 million (with a current fair value of $1 million) was exchanged for another warehouse which also had a current fair value of $1 million. Depreciation has been properly charged from Jan 1, 2005 through Dec 31, 2016. Both parcels of land on which the warehouses were located were equal in value, and had a fair value equal to book value.

June 30, 2017         Machinery with a cost of $120,000 and accumulated depreciation through December 31, 2016 of $90,000 was exchanged, along with $75,000 cash, for a parcel of land with a fair market value of $115,000.

Required

Prepare all appropriate journal entries for Sean Ltd. for the above dates.

Answer 1

Answer;

                                                    Journal Entries for Sean Ltd

Date	Particulars	Debit	Credit
31-03-2017	Depreciation Expense…………………………………………………………	$21,250
	To Accumulated Depreciation-Warehouse (See note 1)    [To record Depreciation for the old warehouse of cost $1.7million]		$21,250
31-03-2017	Warehouse………………………………………………………………………	$743,750
	Accumulated Depreciation-Warehouse…..…… (See note 2)	$956,250
	To Warehouse                                                                     [To write off Accumulated Depreciation for the old warehouse of $1.7million]		$1700,000
30-06-2017	Depreciation Expense…………………………………………………………	$6000
	To Accumulated Depreciation-Machinery(See note 3)    [To record Depreciation for the old machinery of cost $120,000]		$6000
30-06-2017	Land…………………………………………………………………………………	$115,000
	Accumulated Depreciation-Machinery……….(See note 4)	$96,000
	To Cash………………………………………………………………..		$75,000
	To Gain on Exchange……………………………………………..		$16000
	To Machinery [To write off Accumulated Depreciation for the old machinery and Gain on exchange]		$120,000

Notes;

1.Calculation of Depreciation expense of old Warehouse of cost $1.7million @ 5% per year for 3 months (from Jan 2017 to Mar 2017) which is exchanged on March 31,2017

                                                                                                               = $1,700,000*5%*3/12

                                                                                                               = $21,250

So, we are Debit the “Depreciation Expenses “of $21,250, which will record in the Income Statement and Credit the “Accumulated Depreciation” of same amount, which will record in the Balance sheet. Depreciation Expense will record until the life of the Assets or until the cost of Assets will become zero.

2.Calculation of total Accumulation Depreciation charged for old Warehouse of cost $1.7 million @ 5% per year from the purchase to till the date of exchange (from Jan 2005 to Mar 2017 – 11 years and 3 months)

                                                                                                               = $1,700,000*5%*11 3/12

                                                                                                               = $956,250

Here, we are writing off the accumulated depreciation of $956,250 by Debit the same and Credit the total cost of Warehouse at the time of purchase of $1.7 million. The difference between these amounts is the value of warehouse at the time of exchange i.e. $743,750.

There is no Gain/Loss on the exchange of the Warehouse, since the Fair values of old and new warehouse are same.

3.Calculation of Depreciation expense of old Machinery of cost $120,000 @ 10% per year for 6 months (from Jan 2017 to June 2017) which is exchanged on June 31,2017

                                                                                                               = $120,000*10%*6/12

                                                                                                               = $6000

So, we are Debit the “Depreciation Expenses “of $6000, which will record in the Income Statement and Credit the “Accumulated Depreciation” of same amount, which will record in the Balance sheet. Depreciation Expense will record until the life of the Assets or until the cost of Assets will become zero.

4.Calculation of total Accumulation Depreciation charged for old machinery

                                               = Through Dec, 2016 of $90,000 + $6000 for 6 months (from Jan 2017 to June 2017)

                                                 = $90,000 + $6000

                                                 = $96,000

Also, we are Credit the Cash of $75,000 which received on exchange of machinery and Credit cost of machinery. We are writing off the accumulated depreciation of $96,000 by Debit the same. The remaining amount of $16000 will be the Gain on Exchange.