Chapter 8, Problem 5BP

To determine

Prepare journal entries to record the given transaction and events.

Explanation of Solution

• Prepare journal entries to record the given transaction for 2016 as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 1, 2016	Machinery (1)		114,270
	Cash			114,270
	(To record the purchase of machinery)

Table (1)

• Machinery is an asset account and it increases the value of asset. Therefore, debit Machinery account by $114,270.
• Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $114,270.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Depreciation Expense  (2)		17,425
	Accumulated Depreciation –          Machinery			17,425
	(To record the depreciation expense for Machinery)

Table (2)

Description:

• Depreciation Expense is an expense account and it is increased by $17,425. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $17,425.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $17,425.

Working Notes:

Compute the acquisition cost of Machinery:

$\begin{array}{c}\text{Acquisition cost of machinery}=\text{Purchase value}+\text{Sales tax}\\ =\text{\$107,800}+\$6,470\\ =\text{\$114,270}\end{array}$ (1)

Compute depreciation expense:

$\begin{array}{c}\text{Depreciation = }\frac{\left[\text{Acquisition cost of Machinery– Salvage value}\right]}{\text{Useful life}}\\ \text{= }\frac{\text{\$114,270}-\text{\$9,720}}{\text{6 years}}\\ \text{= \$17,425}\end{array}$ (2)

• Prepare journal entries to record the given transaction for 2017 as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2017	Depreciation Expense (5)		27,500
	Accumulated Depreciation –          Machinery			27,500
	(To record the depreciation expense for Machinery)

Table (3)

Description:

• Depreciation Expense is an expense account and it is increased by $27,500. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $27,500.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $27,500.

Working Notes:

Compute the remaining depreciable amount:

Computation of Depreciation
Particulars	$
Acquisition cost, January 1, 2016	$114,270
Less: Accumulated depreciation for first year	(17,425)
Book value	96,845
Less: Revised salvage value	(14,345)
Remaining depreciable amount	$82,500

Table (4) (4)

Compute the revised depreciation for 2017 as follows:

$\begin{array}{c}\text{Annual depreciation }=\frac{\text{Remaining depreciable amount}}{\text{Number of remaining useful years}}\\ =\frac{\text{\$82,500}\text{(4)}}{\text{(4}-1\text{) 3 years}}\\ =\$27,500\end{array}$ (5)

• Prepare journal entries to record the given transaction for 2018 as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Depreciation Expense (5)		27,500
	Accumulated Depreciation –          Machinery			27,500
	(To record the annual depreciation expense for Machinery)

Table (5)

Description:

• Depreciation Expense is an expense account and it is increased by $27,500. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $27,500.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $27,500.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Cash		25,240
	Accumulated Depreciation –          Machinery (6)		72,425
	Loss on disposal of Machinery (6)		16,605
	Machinery			114,270
	(To record the sale of Machinery)

Table (6)

Working Notes:

Compute the gain or loss on the sale of Machinery:

Computation of Gain or Loss on Sale of Machinery
Details	Amount ($)	Amount ($)
Cost of the Asset		114,270
Less: Accumulated depreciation
2016	17,425
2017	27,500
2018	27,500	(72,425)
Book value of asset		41,845
Less: sold value of Machinery		25,240
Loss on sale of Machinery		(16,605)

Table (7) (6)

Description:

• Cash is an asset account and it increases the value of asset. Therefore, debit Cash account by $25,240.
• Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit Accumulated depreciation by $72,425.
• Machinery is an asset account and it decreases the value of asset. Therefore, credit Machinery account by $114.270.
• Loss on sale of Machinery is loss and increased. Therefore, debit the loss on sale of Machinery by $16.605.