Question

Rayya Co. purchases and installs a machine on January 1, 2017, at a total cost of \(105,000. Straight-line depreciation is taken each year for four years assuming a seven-year life and no salvage value. The machine is disposed of on July 1, 2021, during its fifth year of service. Prepare entries to record the partial year’s depreciation on July 1, 2021, and to record the disposal under the following separate assumptions:

1. The machine is sold for \)45,500 cash.

An insurance settlement of $25,000 is received due to the machine’s total destruction in a fire.

Short answer

1. The profit on sale $500
2. Loss on fire $20,000

Step-by-step solution

Computation of accumulated depreciation till machine disposed of (for 4years)

$\begin{array}{rcl}\mathit{s}\mathit{t}\mathit{r}\mathit{a}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathbf{}\mathit{l}\mathit{i}\mathit{n}\mathit{e}\mathbf{}\mathit{m}\mathit{e}\mathit{t}\mathit{h}\mathit{o}\mathit{d}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ depreciation& =& \frac{\$105,000}{7}=\$15,000\\ depreciationfor4years& =& \$15,000\times 4=\$60,000\end{array}$

Book value of the machine at the time of disposal

$$\begin{gathered} bookvalue=\cos t-accumulateddepreciation \\ bookvalue=\$105,000-\$60,000 \\ bookvalue=\$45,000 \end{gathered}$$

Step 3. (1) the machine is sold for $45,500 cash

$\begin{array}{rcl}profitorloss& =& sellingprice-bookvalue\\ profit& =& \$45,500-\$45,000=\$500\end{array}$

July 1	Cash	$45,500
	Accumulated depreciation- machine	$60,000
	Profit on sale of machine		$500
	Machine		$105,000
	Record profit on disposal of machine

(2) destruction in fire and insurance settlement

$\begin{array}{rcl}profitorloss& =& insurancesttlementreceived-bookvalue\\ profitorloss& =& \$25,000-\$45,000\\ & =& \$20,000\left(loss\right)\end{array}$

July 1	Insurance settlement	$25,000
	Loss in fire	$20,000
	Accumulated depreciation	$60,000
	Machine		$105,000
	Record destruction in fire and insurance settlement