Prepare
Explanation of Solution
Plant assets:
Plant assets refer to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.
Prepare journal entries to record the given transaction and events as follows:
Year 1:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
January 1, Year 1 | Machinery (1) | 114,270 | ||
Cash | 114,270 | |||
(To record the purchase of machinery) |
Table (1)
- Machinery is an asset account and it increases the value of asset. Therefore, debit the machinery account by $114,270.
- Cash is an asset account and it decreases the value of asset. Therefore, credit cash account by $114,270.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, Year 1 | Depreciation Expense (2) | 17,425 | ||
17,425 | ||||
(To record the depreciation expense for machinery) |
Table (2)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $17,425.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $17,425.
Working Notes:
Compute the acquisition cost of machinery:
Compute depreciation expense:
Year 2:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, Year 2 | Depreciation Expense (5) | 27,500 | ||
Accumulated Depreciation – Machinery | 27,500 | |||
(To record the depreciation expense for machinery) |
Table (3)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $27,500.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $27,500.
Working Notes:
Compute the remaining depreciable amount:
Computation of Depreciation | |
Particulars | $ |
Acquisition cost, January 1, Year 1 | $114,270 |
Less: Accumulated depreciation for first year | (17,425) |
Book value | 96,845 |
Less: Revised salvage value | (14,345) |
Remaining depreciable amount | $82,500 |
Table (4)
…… (4)
Compute the revised depreciation for 2017 as follows:
Year 3:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, Year 3 | Depreciation Expense (5) | 27,500 | ||
Accumulated Depreciation – Machinery | 27,500 | |||
(To record the annual depreciation expense for machinery) |
Table (5)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $27,500.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $27,500.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, Year 3 | Cash | 25,240 | ||
Accumulated Depreciation – Machinery (6) | 72,425 | |||
Loss on disposal of Machinery (6) | 16,605 | |||
Machinery | 114,270 | |||
(To record the sale of machinery) |
Table (6)
- Cash is an asset account and it increases the value of asset. Therefore, debit the cash account by $25,240.
- Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit the accumulated depreciation by $72,425.
- Loss on sale of Machinery is an expense account and it decreases the value of
stockholder’s equity. Therefore, debit the loss on sale of machinery by $16,605. - Machinery is an asset account and it decreases the value of asset. Therefore, credit the machinery account by $114,270.
Working Notes:
Compute the gain or loss on the sale of machinery:
Computation of gain or loss on sale of machinery | ||
Details | Amount ($) |
Amount ($) |
Cost of the Asset | 114,270 | |
Less: Accumulated depreciation | ||
Year 1(2) | 17,425 | |
Year 2 (5) | 27,500 | |
Year 3 (5) | 27,500 | (72,425) |
Book value of asset | 41,845 | |
Less: sold value of Machinery | 25,240 | |
Loss on sale of machinery | (16,605) |
Table (7)
...... (6)
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Chapter 10 Solutions
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