a company purchases a used machine for $178,000 cash on January 2nd and readies it for use the next day at $2,840 cost. On January 3rd, it is installed on a required operating platform costing $1,160, and is further readied for operations. The company predicts the machine will be used for six years and have a $14,000 salvage value. Depreciation is to be charged ona straight-line basis. On Dec.31, at the end of its fifth year in operations, it is disposed of.
Prepare journal entries to:
a. record the machine's purchase, cost to ready and installation. cash is paid for all costs.
b. record depreciation of the machine Dec. 31 of its first year in operations and also its fifth year in operations.
c. record the machine's disposal if it is destroyed in a fire and the insurance company pays $30,000 cash to settle the loss claim.
a. To record the machine's purchase, cost to ready, and installation, we will use the following accounts:
1. Machinery (asset): Debit $178,000
Cash (asset): Credit $178,000
2. Cost to ready (expense): Debit $2,840
Cash (asset): Credit $2,840
3. Platform installation cost (asset): Debit $1,160
Cash (asset): Credit $1,160
b. To record depreciation of the machine on December 31 of its first and fifth year in operations, we need to calculate the annual depreciation expense first.
Annual Depreciation Expense = (Purchase Cost - Salvage Value) / Useful Life
On December 31 of the first year:
Depreciation Expense (expense): Debit [annual depreciation expense]
Accumulated Depreciation - Machine (contra-asset): Credit [annual depreciation expense]
On December 31 of the fifth year:
Depreciation Expense (expense): Debit [annual depreciation expense]
Accumulated Depreciation - Machine (contra-asset): Credit [annual depreciation expense]
c. To record the machine's disposal if it is destroyed in a fire and the insurance company pays $30,000 cash to settle the loss claim, we will use the following accounts:
1. Insurance Proceeds (income): Debit $30,000
Accumulated Depreciation - Machine (contra-asset): Credit [total accumulated depreciation on the machine]
Machinery (asset): Credit [original cost of the machine]
Note: If the insurance proceeds exceed the carrying value (book value) of the machine, there would be a gain on disposal. Conversely, if the insurance proceeds are less than the carrying value, there would be a loss on disposal. However, this information is not provided in the given question.