In: Accounting
. 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.
Answer:
a.
b.(1)
b.(2)
b.(3)
Please explain your calculations so it is easier to understand, thank you.
Annual depreciation under striaght-line method = (Cost of machine - Salvage value)/Useful life
Here,
Cost of machine = $108,500
Salvage value = 0
Useful life = 7 years
Therefore,
Annual depreciation = ($108,500 - 0)/7 = $15,500
The machine was disposed of on April 1, 2016. This means the machine was used for only three months in 2016 that is January through March.
Thus, depreciation to be recorded on April 1, 2016 = $15,500 x 3/12 = 3,875
a. Prepare the general journal entry to update depreciation to April 1, 2016.
Date | Account Titles | Debit | Credit |
Apr. 1, 2016 | Depreciation Expense - Machine | 3875 | |
Accumulated Depreciation - Machine | 3875 |
b.
1.
Accumulated depreciation on April 1, 2016 = ($15,500 x 4) + $3,875 = $65,875
Book value of the machine on April 1, 2016 = Cost - Accumulated depreciation = $108,500 - $65,875 = $42,625
The machine was sold for $45,000
Therefore,
Gain on sale of machine = $45,000 - $42,625 = $2,375
Prepare the required journal entry as follows:
Account Titles and Explanation | Debit | Credit |
Cash | 45000 | |
Accumulated Depreciation - Machine | 65875 | |
Equipment | 108500 | |
Gain on Sale of Machine | 2375 |
2.
Book value of the machine on April 1, 2016 = Cost - Accumulated depreciation = $108,500 - $65,875 = $42,625
The machine was sold for $36,000
Therefore,
Loss on sale of machine = $42,625 - $36,000 = $6,625
Prepare the required journal entry as follows:
Account Titles and Explanation | Debit | Credit |
Cash | 36000 | |
Accumulated Depreciation - Machine | 65875 | |
Loss on sale of machine | 6625 | |
Equipment | 108500 |
3.
Book value of the machine on April 1, 2016 = Cost - Accumulated depreciation = $108,500 - $65,875 = $42,625
Cash received from insurance company = $41,000
Therefore,
Loss from fire = $42,625 - $41,000 = $1,625
Prepare the required journal entry as follows:
Account Titles and Explanation | Debit | Credit |
Cash | 41000 | |
Accumulated Depreciation - Machine | 65875 | |
Loss from fire | 1625 | |
Equipment | 108500 |