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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On July 1, 2019, Osceola Company retired a metal stamping machine that it had originally purchased for $1,500,000. At December 31, 2018, the machine had a book value of $125,000 and was being depreciated on a straight-line basis at $75,000 per year. Osceola sold the machine for $200,000.

Required:

  1. 1. Prepare any journal entries necessary to record the disposal of the machine.
  2. 2. Next Level How does the disposal of the machine affect the 2019 financial statements?

1.

To determine

Prepare necessary journal entries to record the disposal of the machine for 2019.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

DateAccount Title & ExplanationDebit ($)

Credit

($)

July 1, 2019Depreciation expense (1)37,500 
 Accumulated depreciation-Office fixtures 37,500
 (To record the depreciation expense incurred)

Table (1)

  • Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $37,500.
  • Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $37,500.

Working note (1):

Calculate the depreciation expense of machine under straight line method:

Depreciation expenses=[Annaul depreciation expense ×Depreciation expense incurredMonths in a year] =$75,000×(6 (December 31, 2018 to July 1, 2019))12=$37,500

DateAccount Title & ExplanationDebit ($)

Credit

($)

July 1, 2019Cash200,000 
 Accumulated depreciation-Machine (2)1,412,500 
 Machine 1,500,000
 Gain on disposal of machine (3) 112,500
 (To record the disposal of machine)  

Table (2)

  • Cash is an asset and it is increased by $200,000

2.

To determine

Explain the manner in which the disposal of machine would affect the financial statement of Company O for 2019.

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