Question

Onslow Co. purchases a used machine for $144,000 cash on January 2 and readies it for use the next day at a $8,000 cost. On January 3, it is installed on a required operating platform costing $1,600, and it is further readied for operations. The company predicts the machine will be used for six years and have a $17,280 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of.

1.) Prepare journal entries to record the machine's purchase and the costs to ready and install it. Cash is paid for all costs incurred.

2.) Prepare journal entries to record depreciation of the machine at December 31.

(a) Its first year in operations.

(b) The year of its disposal.

3.) Prepare journal entries to record the machine's disposal under each of the following separate assumptions:

(a) It is sold for $20,500 cash.

(b) It is sold for $82,000 cash.

(c) It is destroyed in a fire and the insurance company pays $31,000 cash to settle the loss claim.

Answer 1

Answer:

Requirement 1

January 2

Machine $152,000  (debit)

Cash $152,000 (credit)

January 3

Machine $1,600 (debit)

Cash $1,600 (debit)

Requirement 2

(a) Its first year in operations.

Depreciation Charge  =$22,720

(b) The year of its disposal.

Depreciation Charge  =$22,720

Requirement 3(a)

Cash  $20,500 (debit)

Accumulated Depreciation $113,600 (debit)

Loss on Sale of Machine $ 19,500 (debit)

Machine 153,600 (credit)

Requirement 3(b)

Cash  $82,000 (debit)

Accumulated Depreciation $113,600 (debit)

Profit on Sale of Machine $ 42,000 (credit)

Machine 153,600 (credit)

Requirement 3(a)

Cash - Insurance  Compensation $31,000 (debit)

Accumulated Depreciation $113,600 (debit)

Loss on Compensation $ 9,000 (debit)

Machine 153,600 (credit)

Explanation:

Requirement 1

January 2

Machine $152,000  (debit)

Cash $152,000 (credit)

January 3

Machine $1,600 (debit)

Cash $1,600 (debit)

Requirement 2

Depreciation Charge = (Cost - Salvage Value)/Useful Life

                                   =(($152,000+$1,600)-$17,280)/6

                                   =$22,720

(a) Its first year in operations.

Depreciation Charge  =$22,720

(b) The year of its disposal.

Depreciation Charge  =$22,720

Requirement 3(a)

Cash  $20,500 (debit)

Accumulated Depreciation $113,600 (debit)

Loss on Sale of Machine $ 19,500 (debit)

Machine 153,600 (credit)

Requirement 3(b)

Cash  $82,000 (debit)

Accumulated Depreciation $113,600 (debit)

Profit on Sale of Machine $ 42,000 (credit)

Machine 153,600 (credit)

Requirement 3(a)

Cash - Insurance  Compensation $31,000 (debit)

Accumulated Depreciation $113,600 (debit)

Loss on Compensation $ 9,000 (debit)

Machine 153,600 (credit)