Question

Yellow School Bus Company had machinery that had originally cost $328,000. The machinery was three years old and had been depreciated using the double-declining-balance method, over a five-year useful life with a residual value of $24,000. Answer each of the following independent questions:

A.     If the company sold the machinery for $140,000, prepare a journal entry to record the sale.
B.     If the company sold the machinery for $64,000, prepare a journal entry to record the sale.

Answer 1

Answer a)

If machine is sold for $ 140,000

Journal

Particulars	Debit	Credit
Cash	$140,000
Machine		$70,848
Gain on sale of machine		$69,152
(being machine sold)

Answer b)

If machine is sold for $ 64,000

Journal

Particulars	Debit	Credit
Cash	$64,000
Loss on sale of machine	$6,848
Machine		$70,848
(being machine sold)

Working Note:

Calculation of rate of depreciation under straight-line depreciation method:

Rate of depreciation under Straight-line method = 1/number of years of useful life of asset

                                                                                          = 1/ 5

                                                                                          = 20%

Calculation of rate of depreciation under double declining balance method:

Rate of deprecation under double declining balance method = rate of depreciation under straight-line depreciation method X 2

                                                                                                                 = 20% X 2

                                                                                                                 = 40%  

Calculation of book value of machinery at the end of 3rd year

Year -1

Opening book value = $ 328,000

Depreciation for year 1 = $ 328,000 X 40%    

                                           = $ 131,200       

Accumulated depreciation at the end of year 1 = $ 131,200

Closing book value = Opening book value – Accumulated depreciation

                                    = $ 328,000 - $ 131,200

                                    = $ 196,800

Year -2

Opening book value = $ 196,800

Depreciation for year 2 = $ 196,800 X 40%    

                                           = $ 78,720       

Accumulated depreciation at the end of year 2 = $ 131,200 + $ 78,720

                                                                                      = $ 209,920

Closing book value = Opening book value – Accumulated depreciation

                                    = $ 328,000 - $ 209,920

                                    = $ 118,080

Year -3

Opening book value = $ 118,080

Depreciation for year 3 = $ 118,080 X 40%    

                                           = $ 47,232       

Accumulated depreciation at the end of year 2 = $ 131,200 + $ 78,720 + $ 47,232

                                                                                      = $ 257,152

Closing book value = Opening book value – Accumulated depreciation

                                    = $ 328,000 - $ 257,152

                                    = $ 70,848

Calculation of gain/ (loss) on sale of machine if it is sold for $ 140,000

Particulars	Amount (In $)
Proceeds from sales of machine	140,000
Less: Net book value at the end of year 3	70,848
Gain on sale of machine	69,152

Calculation of gain/ (loss) on sale of machine if it is sold for $ 64,000

Particulars	Amount (In $)
Proceeds from sales of machine	64,000
Less: Net book value at the end of year 3	70,848
Gain/ (Loss) on sale of machine	(6,848)