Question

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine	\)1,300,000
Less: Accumulated depreciation	360,000
Book value	\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

Short answer

1. Losson disposal of machinery is $470,000
2. Gainon disposable machinery is $115,000
3. Gain on donated machinery is $195,000

Step-by-step solution

Meaning of Depreciation

Depreciation refers to the decline in the value of all fixed assets except land.

(a) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
Aug. 31, 2018	Depreciation Expense	40,000
	Accumulated Depreciation Machinery		40,000
Aug. 31, 2018	Loss on Disposal of Machinery	470,000
	Cash	430,000
	Accumulated Depreciation-Machinery	400,000
	Machine		1,300,000

Working notes:

Calculation of depreciation expense

$\begin{array}{rcl}\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathit{S}\mathit{t}\mathit{r}\mathit{a}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathbf{}\mathit{l}\mathit{i}\mathit{n}\mathit{e}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{\times }\frac{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}}{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{8}}{\mathbf{12}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\end{array}$

Calculating the amount of loss on disposal of Machinery

$\begin{array}{rcl}\mathit{L}\mathit{o}\mathit{s}\mathit{s}\mathbf{}\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{a}\mathit{l}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathit{r}\mathit{y}& \mathbf{=}& \left(Machinerycost-Accumulateddepreciation\right)\mathbf{-}\mathit{I}\mathit{n}\mathit{s}\mathit{u}\mathit{r}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{}\mathit{s}\mathit{e}\mathit{t}\mathit{t}\mathit{l}\mathit{e}\mathit{m}\mathit{e}\mathit{n}\mathit{t}\\ & \mathbf{=}& \left(\$1,300,000-\$400,000\right)\mathbf{-}\mathbf{\$}\mathbf{430}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{900}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{430}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{470}\mathbf{,}\mathbf{000}\end{array}$

(b) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
Apr.1, 2018	Depreciation Expense	15,000
	Accumulated Depreciation-Machinery		15,000
Apr.1, 2018	Cash	1,040,000
	Accumulated Depreciation-Machinery	375,000
	Machine		1,300,000
	Gain on Disposal of Machinery		115,000

Working notes:

Calculation of depreciation

$\begin{array}{rcl}\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathit{S}\mathit{t}\mathit{r}\mathit{a}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathbf{}\mathit{l}\mathit{i}\mathit{n}\mathit{e}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{\times }\frac{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{t}\mathbf{h}}{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{3}}{\mathbf{12}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}\end{array}$

Calculation gain on disposable machinery

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathit{r}\mathit{y}& \mathbf{=}& \mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{-}\left(Machinerycost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{040}\mathbf{,}\mathbf{000}\mathbf{-}\left(\$1,300,000-\$375,000\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{115}\mathbf{,}\mathbf{000}\end{array}$

(c) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
Jul. 31,2018	Depreciation Expense	35,000
	Accumulated Depreciation-Machinery		35,000
Jul. 31,2018	Contribution Expense	1,100,000
	Accumulated Depreciation-Machinery	395,000
	Machine		1,300,000
	Gain on Disposal of Machinery		195,000

Working notes:

Calculation of depreciation

$\begin{array}{rcl}\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathit{S}\mathit{t}\mathit{r}\mathit{a}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathbf{}\mathit{l}\mathit{i}\mathit{n}\mathit{e}\mathbf{}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{\times }\frac{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{m}\mathbf{o}\mathbf{n}}{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{7}}{\mathbf{12}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{000}\end{array}$

Calculation gain on disposable machinery

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathit{r}\mathit{y}& \mathbf{=}& \mathit{C}\mathit{o}\mathit{n}\mathit{t}\mathit{r}\mathit{i}\mathit{b}\mathit{u}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\mathbf{-}\left(Machinerycost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{100}\mathbf{,}\mathbf{000}\mathbf{-}\left(\$1,300,000-\$375,000\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{195}\mathbf{,}\mathbf{000}\end{array}$