Question

During the current year, Merkley Company disposed of three different assets. On January 1 of the current year, prior to their disposal, the accounts reflected the following:

Asset	Original Cost		Residual Value		Estimated Life	Accumulated Depreciation (straight line)
Machine A	$	36,000	$	3,000	10 years	$	26,400 (8 years)
Machine B		53,000		4,000	10 years		39,200 (8 years)
Machine C		75,200		5,200	16 years		52,500 (12 years)

The machines were disposed of in the following ways:

  
a. Machine A: Sold on January 1 for $9,200 cash.

b. Machine B: Sold on December 31 for $9,600; received cash, $2,000, and a $7,600 interest-bearing (12 percent) note receivable due at the end of 12 months.

c. Machine C: On January 1, this machine suffered irreparable damage from an accident. On January 10, a salvage company removed the machine at no cost

Required information

Required:

1. Give all journal entries related to the disposal of each machine in the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

a. Machine A

b. Machine B.

c. Machine C

2. Explain the accounting rationale for the way that you recorded each disposal.

MACHINE A : disposal of a long lived asset with the price below net book valueresults in a __________

MACHINE B : disposal of a long lived asset with the price above net book valueresults in a __________

MACHINE C: disposal of a long lived asset due to damage results in a _________

___________remaining book value.

Answer 1

1.     Cash A/C dr.               9200

       Profit and loss A/C dr.    400(loss on sale of machine A)

                      To machine A A/C cr. 9600

(Being machine A sold at $9200 , $400 lower than its book value ($36000-$26400) i.e.$9600)

2.    Cash A/C dr.                2000

   Interest bearing note A/c dr.     7600

           Profit and loss A/C dr.   4200

                                   To Machine B a/c cr. 13800

(being machine b sold at $9600 having book value $13800($53000-$39200), $2000 in cash and $7600 as interest bearing note)

3. Profit and loss A/C dr.   22700

                To Machine C A/C cr.            22700

(being book value of machine c $22700 is sold for novalue , hence all value is considered as loss and charges to profit and loss account)

2.

1.loss on sale

2.profit on sale

3.loss of remaining book value