Question

Onslow Co. purchases a used machine for \(178,000 cash on January 2 and readies it for use the next day at a \)2,840 cost. On January 3, it is installed on a required operating platform costing \(1,160, and it is further readied for operations. The company predicts the machine will be used for six years and have a \)14,000 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of. Required

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 of (a) its first year in operations and (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 \(15,000 cash; (b) it is sold for \)50,000 cash; and (c) it is destroyed in a fire and the insurance company pays $30,000 cash to settle the loss claim.

Short answer

1. The machine account is debited at $180,840
2. The depreciation is $28,000
3. Book value is $42,000

Step-by-step solution

Journal entry to record machine’s purchase

January 2	Machine	$180,840
	Cash		$180,840
	Record purchase of the machine ($178,000 + $2,840)

January 3	Machine	$1,160
	Cash		$1,160
	Record ordinary expense

Journal entry to record depreciation

$\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}$

$\begin{array}{rcl}depreciation& =& \frac{\left(\$180,840+\$1,160\right)-\$14,000}{6}\\ depreciation& =& \frac{\$168,000}{6}\\ \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{000}\end{array}$

Dec. 31 (1st Year)	Depreciation	$28,000
	Accumulated depreciation-machine		$28,000
	Record of annual depreciation

Dec.31 (5th Year)	Depreciation	$28,000
	Accumulated depreciation-machine		$28,000
	Record of annual depreciation

Journal entry to record disposal of the machine

Calculation of book value: -

$\begin{array}{rcl}\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}& \mathbf{=}& \mathit{c}\mathit{o}\mathit{s}\mathit{t}\mathbf{-}\mathit{a}\mathit{c}\mathit{c}\mathit{u}\mathit{m}\mathit{u}\mathit{l}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{.}\\ bookvalue& =& \left(\$178,000+\$2,840+\$1,160\right)-\left(\$28,000\times 5years\right)\\ bookvalue& =& \$182,000-\$140,000\\ \mathit{B}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}& \mathbf{=}& \mathbf{\$}\mathbf{42}\mathbf{,}\mathbf{000}\end{array}$

Sold for $15,000 cash: -

Cash	$15,000
Loss on Disposal of machine	$27,000
Accumulated depreciation	$140,000
Machine		$182,000
(Record sale of machine for a loss of $27,000.)

Sold for $50,000 cash: -

Cash	$50,000
Accumulated depreciation	$140,000
Gain on Disposal of machine		$8,000
Machine		$182,000
(Record sale of machine for $11,000 gain.)

Destroyed in fire and insurance claim: -

Loss by fire	$42,000
Insurance claim		$30,000
Loss on insurance claim		$12,000
Record loss by fire and insurance claim