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.
What was the answer?
1. To prepare the general journal entry to update depreciation to July 1 in the fourth year, we need to calculate the accumulated depreciation up until that date. Since straight-line depreciation was calculated based on a five-year life with no salvage value, we can divide the total cost by the number of years to get the annual depreciation expense.
Annual Depreciation Expense = Total Cost / Number of Years
Annual Depreciation Expense = $72,000 / 5
Annual Depreciation Expense = $14,400 per year
To calculate the accumulated depreciation up until July 1 in the fourth year, we need to multiply the annual depreciation expense by the number of years the machine was in use.
Accumulated Depreciation = Annual Depreciation Expense * Number of Years in Use
Accumulated Depreciation = $14,400 * 4
Accumulated Depreciation = $57,600
Now, we can prepare the general journal entry:
Date: July 1, Year 4
Account Debit Credit
Depreciation Expense $57,600
Accumulated Depreciation $57,600
2. a. To prepare the general journal entry for the disposal of the machine, which was sold for $22,000 cash, we need to compare the cash received from the sale with the book value (cost - accumulated depreciation) of the machine.
Book Value = Total Cost - Accumulated Depreciation
Book Value = $72,000 - $57,600
Book Value = $14,400
As the machine was sold for $22,000 cash, we need to consider whether there is a gain or loss on the sale.
Gain/Loss on Sale = Selling Price - Book Value
Gain/Loss on Sale = $22,000 - $14,400
Gain/Loss on Sale = $7,600 (gain)
Now, we can prepare the general journal entry:
Date: [Date of the disposal]
Account Debit Credit
Cash $22,000
Accumulated Depreciation $57,600
Machine (book value) $14,400
Gain on Sale of Machine $7,600
b. To prepare the general journal entry for the disposal of the machine, which was sold for $15,000 cash, we follow the same process as above, but with a different selling price.
Book Value = Total Cost - Accumulated Depreciation
Book Value = $72,000 - $57,600
Book Value = $14,400
Gain/Loss on Sale = Selling Price - Book Value
Gain/Loss on Sale = $15,000 - $14,400
Gain/Loss on Sale = $600 (gain)
Now, we can prepare the general journal entry:
Date: [Date of the disposal]
Account Debit Credit
Cash $15,000
Accumulated Depreciation $57,600
Machine (book value) $14,400
Gain on Sale of Machine $600
c. To prepare the general journal entry for the disposal of the machine, which was totally destroyed in a fire, and the insurance company settled the claim for $18,000 cash, we need to record the insurance proceeds as cash received instead of the selling price.
Now, we can prepare the general journal entry:
Date: [Date of the disposal]
Account Debit Credit
Cash $18,000
Accumulated Depreciation $57,600
Machine (book value) $14,400
Loss on Disposal of Machine $24,000
Note: In this case, we record a loss on the disposal because the insurance proceeds ($18,000) are less than the book value of the machine ($14,400). The difference between the book value and the insurance proceeds is considered a loss.