Question

Onslow Co. purchased a used machine for $240,000 cash on January 2. On January 3, Onslow paid $6,000 to wire electricity to the machine and an additional $1,200 to secure it in place. The machine will be used for six years and have a $28,800 salvage value. Straight-line depreciation is used. On December 31, at the end of its fifth year in operations, it is disposed of.

3. Prepare journal entries to record the machine’s disposal under each separate situation: (a) it is sold for $24,500 cash; (b) it is sold for $98,000 cash; and (c) it is destroyed in a fire and the insurance company pays $35,000 cash to settle the loss claim.

Entry #1 prepare the sale of the used machine for 24,500 cash.

Entry #2 record the same of the used machine for 98,000 cash.

Entry #3 record the insurance settlement received of 35,000 resulting from the total destruction of the machine in the fire.

Answer 1

Journal Entries:

Answer:

No.	Date	General Journal	Debit	Credit
1	Dec-31	Cash	24,500
		Accumulated depreciation - Machinery	182,000
		Loss on sale of machinery	40,700
		Machinery		247,200
		To record the machine’s disposal at cash of 24,500
2	Dec-31	Cash	98,000
		Accumulated depreciation - Machinery	182,000
		Gain on sale of machinery		32,800
		Machinery		247,200
		To record the machine’s disposal at cash of 98,000
3	Dec-31	Cash	35,000
		Accumulated depreciation - Machinery	182,000
		Loss from fire	30,200
		Machinery		247,200
		To record the insurance settlement of 35,000 received due to destruction of machine in the fire

Calculation

Entry #1 :

To record the sale of the used machine for 24,500 cash.

So, cash received is 24,500.

Then we need to calculate the Accumulated depreciation at the time of disposal of machine. As it was disposed at the end of its fifth year in operations. So 5 year depreciation will be :

Cost of machinery = 240,000 + 6,000 + 1,200 = 247,200

Salvage value = 28,800

Useful life = 6 years

Depreciation = (247,200 - 28,800)/6 = 36,400

Hence for 5 years depreciation = 36,400 * 5 = 182,000

So the accumulated depreciation is 182,000

The book value at the time of disposal = Original total cost - Accumulated depreciation = 247,200 - 182,000 = 65,200

As the cash received from sale is less than the book value at the time of disposal, there is loss on sale of machinery.

Loss on sale of machinery = Cost of machinery - Accumulated depreciation - Cash received = 247,200 - 182,000 - 24,500 = 40,700

Entry #2

To record the same of the used machine for 98,000 cash.

So, cash received is 98,000.

The Accumulated depreciation at the time of disposal of machine is already calculated in entry 1. So the accumulated depreciation is 182,000

Cost of machinery = 240,000 + 6,000 + 1,200 = 247,200

The book value at the time of disposal = Original total cost - Accumulated depreciation = 247,200 - 182,000 = 65,200

As the cash received from sale is greater than the book value at the time of disposal, there is gain on sale of machinery.

Gain on sale of machinery = Accumulated depreciation + Cash received - Cost of machinery = 182,000 + 98,000 - 247,200 = 32,800

Entry #3

To record the insurance settlement received of 35,000 resulting from the total destruction of the machine in the fire.

So, cash received is 35,000.

The Accumulated depreciation at the time of disposal of machine is already calculated in entry 1. So the accumulated depreciation is 182,000

Cost of machinery = 240,000 + 6,000 + 1,200 = 247,200

The book value at the time of disposal = Original total cost - Accumulated depreciation = 247,200 - 182,000 = 65,200

As the insurance settlement received from the total destruction of the machine in the fire is less than the book value, there is loss from fire.

Loss from fire = Cost of machinery - Accumulated depreciation - Cash received = 247,200 - 182,000 - 35,000 = 30,200