Question

1. A company purchased and installed a machine on January 1, 2012, at a total cost of $108,500. Straight-line depreciation was calculated based on the assumption of a seven-year life and no salvage value. The machine was disposed of on April 1, 2016. (25 Points)

a. Prepare the general journal entry to update depreciation to April 1, 2016.
b. Prepare the general journal entry to record the disposal of the machine under each of these three independent situations:
(1) The machine was sold for $45,000 cash.
(2) The machine was sold for $36,000 cash.
(3) The machine was totally destroyed in a fire and the insurance company settled the claim for $41,000 cash.

Please explain how you are solving the problem.

Answer:

a.

b.(1)

b.(2)
  

b.(3)                

Answer 1

• All working forms part of the answer
• Working 1: Depreciation [total] calculation and Book Value when asset is disposed off

A	Cost of Machine	$ 1,08,500.00
B	Life	7
C=A/B	Annual SLM depreciation	$      15,500.00
D=C x 4years	4 year Accumulated depreciation from 1 Jan 2012 to 31 Dec 2015	$      62,000.00
E= C x 3/12	3 months depreciation for 2016 [15500 x 3 /12] [For Journal Entry (a)]	$        3,875.00
F=D+E	Total accumulated depreciation when disposed off	$      65,875.00
G=A-F	Book Value at the time of disposal [108500 – 65875]	$      42,625.00

• Working 2: Gain and Loss for each case

	Cases	1	2	3
A	Book Value [calculated above in Working 1]	$      42,625.00	$           42,625.00	$         42,625.00
B	Sold for/Claim received [given]	$      45,000.00	$           36,000.00	$         41,000.00
C=B – A	Gain (Loss) on disposal or sale	$        2,375.00	$           (6,625.00)	$         (1,625.00)

• All Journal Entries

Working/Explanation	General Journal	Debit	Credit
Answer (a)	Depreciation expense-Machine	$        3,875.00
(Working 1, Column 'E')	Accumulated depreciation-Machine		$             3,875.00
Answer (b)
1	Cash	$      45,000.00
(See working for Case 1)	Accumulated depreciation-Machine	$      65,875.00
	Gain on Sale/Disposal		$             2,375.00
	Machine		$       1,08,500.00
2	Cash	$      36,000.00
(See working for Case 2)	Accumulated depreciation-Machine	$      65,875.00
	Loss on Sale/Disposal	$        6,625.00
	Machine		$       1,08,500.00
3	Cash	$      41,000.00
(See working for Case 3)	Accumulated depreciation-Machine	$      65,875.00
	Loss on Sale/Disposal	$        1,625.00
	Machine		$       1,08,500.00