On January 1, Walker purchased a used machine for $150,000. On January 4, Walker paid $3,510 to wire electricity to the machine and an additional $4,600 to secure it in place. The machine will be used seven years and have an $18,110 salvage value. Straight-line
Required
- 1. Prepare
journal entries to record the machine’s purchase and the costs to ready it for use. Cash is paid for all costs incurred. - 2. Prepare journal entries to record depreciation of the machine at December 31 of (a) its first year of operations and (b) the year of its disposal.
- 3. Prepare journal entries to record the machine’s disposal under each separate situation: (a) it is sold for $28,000 cash; (b) it is sold for $52,000 cash; and (c) it is destroyed in a fire and the insurance company pays $25,000 cash to settle the loss claim.
1.
Prepare journal entries to record the purchase of machine and other capital expenditures.
Explanation of Solution
Plant assets:
Plant assets refer to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.
Prepare journal entries to record the purchase of machine and other capital expenditures as follows:
Purchase of machinery in cash:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
January, 1 | Machinery | 150,000 | ||
Cash | 150,000 | |||
(To record the machinery purchased in cash) |
Table (1)
- Machinery is an asset account and it increases the value of asset by $150,000. Therefore, debit machinery account for $150,000.
- Cash is an asset account and it decreases the value of asset by $150,000. Therefore, credit Cash account for $150,000.
Installation and other capital expenditure:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
January, 2 and 4 | Machinery | 8,110 | ||
Cash | 8,110 | |||
(To record the capital expenditure incurred for machinery) |
Table (2)
- Machinery is an asset account and it increases the value of asset by $8,110. Therefore, debit machinery account for $8,110.
- Cash is an asset account and it decreases the value of asset by $8,110. Therefore, credit Cash account for $8,110.
2.
Prepare journal entry to record depreciation expense for the following years;
- a. First year and
- b. The (sixth) year of its disposal.
Explanation of Solution
Straight-Line Method:
In straight-line deprecation method the asset is used evenly throughout its useful life. This is because the amount of depreciation in straight line remains same for all the years of the useful life of the asset.
- a. Prepare journal entry to record depreciation expense for first year as follows:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
December 31 | Depreciation expense-Machinery (1) | 20,000 | ||
Accumulated depreciation-Machinery | $20,000 | |||
(To record depreciation expense incurred at the end of the first year) |
Table (3)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $20,000.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit accumulated depreciation by $20,000.
(b) The year of its disposal:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
December 31 | Depreciation expense-Machinery (1) | 20,000 | ||
Accumulated depreciation-Machinery | $20,000 | |||
(To record depreciation expense incurred at the end of the sixth year) |
Table (4)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $20,000.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit accumulated depreciation by $20,000.
Working note:
Compute the depreciation expenses:
3.
Prepare journal entries to record the disposal of machinery under the given situation.
Explanation of Solution
Prepare journal entries to record the disposal of machinery under the given situation as follows:
- a. Machinery sold for $20,000 cash:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
Cash | 20,000 | |||
Accumulated Depreciation – Machinery (2) | 120,000 | |||
Loss on disposal of Machinery (4) | 10,110 | |||
Machinery (3) | $158,110 | |||
(To record the loss on disposal of machinery) |
Table (5)
- Cash is an asset, and it increases the value of assets by $20,000. Therefore, debit the cash account with $20,000.
- Accumulated depreciation is a contra asset, and it increases the asset by $120,000. Therefore, debit Accumulated depreciation with $120,000.
- Loss on sale of machinery is loss of the company and it decreases the value of equity by $10,110. Therefore, debit the loss on sale of machinery with $10,110.
- Machinery is an asset, and it decreases the value of assets by $158,110. Therefore, credit machinery account by $158,110.
Working note:
Calculate the accumulated depreciation for 6 years:
Calculate the book value of machinery:
Calculate the loss on disposal of machinery:
- b. Machinery is sold for $52,000 cash:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
Cash | 52,000 | |||
Accumulated Depreciation – Machinery (2) | 120,000 | |||
Machinery (3) | $158,110 | |||
Gain from sale of machinery (5) | $13,890 | |||
(To record the gain from disposal of machinery) |
Table (6)
- Cash is an asset, and it increases the value of assets by $52,000. Therefore, debit the cash account with $52,000.
- Accumulated depreciation is a contra asset, and it increases the asset by $120,000. Therefore, debit Accumulated depreciation with $120,000.
- Machinery is an asset, and it decreases the value of assets by $158,110. Therefore, credit machinery account by $158,110.
- Gain from sale of machinery is revenue of the company and it increases the value of equity by $13,890. Therefore, debit the loss on sale of machinery with $13,890.
Working note:
Calculate the gain from disposal of machinery:
- c. Machinery is destroyed in a fire and the insurance company pays $25,000 cash to settle the loss claim:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
Cash | 25,000 | |||
Accumulated Depreciation – Machinery (2) | 120,000 | |||
Loss on Fire (6) | 13,110 | |||
Machinery (3) | $158,110 | |||
(To record the loss on fire) |
Table (7)
- Cash is an asset, and it increases the value of assets by $25,000. Therefore, debit the cash account with $25,000.
- Accumulated depreciation is a contra asset, and it increases the asset by $120,000. Therefore, debit Accumulated depreciation with $120,000.
- Loss on fire is loss of the company and it decreases the value of equity by $13,110. Therefore, debit the loss on fire with $13,110.
- Machinery is an asset, and it decreases the value of assets by $158,110. Therefore, credit machinery account by $158,110.
Working note:
Calculate the loss on disposal of machinery:
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Chapter 10 Solutions
Principles of Financial Accounting.
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