A company purchased and installed a machine on January 1 at a total cost of $72,000. Straight-line
depreciation was calculated based on the assumption of a five-year life and no salvage value. The
machine was disposed of on July 1 of the fourth year. The company uses the calendar year.
1. Prepare the general journal entry to update depreciation to July 1 in the fourth year.
2. Prepare the general journal entry to record the disposal of the machine under each of these three
independent situations:
a. The machine was sold for $22,000 cash.
b. The machine was sold for $15,000 cash.
c. The machine was totally destroyed in a fire and the insurance company settled the claim for $18,000
cash.
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To prepare the general journal entry for updating depreciation to July 1 in the fourth year, we first need to calculate the accumulated depreciation as of that date.
The straight-line depreciation method is used, which means that the same amount of depreciation is recognized each year. In this case, since the machine has a five-year life with no salvage value, the annual depreciation expense would be $72,000 / 5 = $14,400.
We need to determine the number of years that have passed from January 1 (when the machine was purchased and installed) to July 1 in the fourth year. This would be 3 and a half years.
To calculate the accumulated depreciation as of July 1 in the fourth year, multiply the annual depreciation expense by the number of years:
$14,400 x 3.5 = $50,400
Now we can prepare the general journal entry to update the depreciation:
Date: July 1, [Year]
Depreciation Expense: $50,400
Accumulated Depreciation: $50,400
For the second part, we need to prepare the general journal entry to record the disposal of the machine under each of the three independent situations.
a. The machine was sold for $22,000 cash.
Date: [Date of disposal]
Cash: $22,000
Accumulated Depreciation: $50,400
Loss on Disposal of Machine: [Calculation needed]
To calculate the Loss on Disposal of Machine, subtract the cash received from the machine's carrying value (cost - accumulated depreciation):
$72,000 - $50,400 = $21,600
Loss on Disposal of Machine: $21,600
b. The machine was sold for $15,000 cash.
Date: [Date of disposal]
Cash: $15,000
Accumulated Depreciation: $50,400
Gain on Disposal of Machine: [Calculation needed]
In this case, since the machine was sold for less than its carrying value, it results in a loss.
Loss on Disposal of Machine: $72,000 - $15,000 - $50,400 = $6,600
c. The machine was totally destroyed in a fire, and the insurance company settled the claim for $18,000 cash.
Date: [Date of destruction]
Cash: $18,000
Accumulated Depreciation: $50,400
Loss on Disposal of Machine: [Calculation needed]
Since the machine was destroyed, there is no gain or loss. The cash received from the insurance company should be recorded as a recovery of the machine's carrying value.
Loss on Disposal of Machine: $0 (no loss or gain)
I hope this helps! If you have any further questions, feel free to ask.