FINANCIAL ACCT.FUND(LL)W/ACCESS>CUSTOM<
FINANCIAL ACCT.FUND(LL)W/ACCESS>CUSTOM<
6th Edition
ISBN: 9781260255119
Author: Wild
Publisher: MCG CUSTOM
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Chapter 8, Problem 6AP

1.

To determine

Prepare journal entries to record the machine’s purchase and other capital expenditures.

1.

Expert Solution
Check Mark

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities.
  • Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

Prepare journal entries to record the machine’s purchase and other capital expenditures as follows:

Purchase of machinery in cash:

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

January, 2Machinery 178,000 
Cash  178,000
 (To record the machinery purchased in cash)   

Table (1)

  • Machinery is an asset account and it increases the value of asset by $178,000. Therefore, debit machinery account for $178,000.
  • Cash is an asset account and it decreases the value of asset by $178,000. Therefore, credit Cash account for $178,000.

Installation and other capital expenditure:

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

January, 3Machinery ($2,840+$1,160) 4,000 
Cash  4,000
 (To record the capital expenditure incurred for machinery)   

Table (2)

  • Machinery is an asset account and it increases the value of asset by $4,000. Therefore, debit machinery account for $4,000.
  • Cash is an asset account and it decreases the value of asset by $4,000. Therefore, credit Cash account for $4,000.

2.

To determine

Prepare journal entry for depreciation expense (a) First year and (b) the year of its disposal.

2.

Expert Solution
Check Mark

Explanation of Solution

Straight-Line Method:

In straight-line deprecation method the asset is used evenly throughout its useful life. This is because the amount of depreciation in straight line remains same for all the years of the useful life of the asset.

Prepare journal entry for depreciation expense (a) First year and (b) the year of its disposal as follows:

(a) First year:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
December 31Depreciation expense-Machinery (1) 28,000 
 Accumulated depreciation-Machinery  $28,000
 (To record depreciation expense incurred at the end of the first year)   

Table (3)

  • Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $28,000.
  • Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit accumulated depreciation by $28,000.

(b) The year of its disposal:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
December 31Depreciation expense-Machinery (1) 28,000 
 Accumulated depreciation-Machinery  $28,000
 (To record depreciation expense incurred at the end of the first year)   

Table (4)

  • Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $28,000.
  • Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit accumulated depreciation by $28,000.

Working note:

Compute the depreciation expenses

Annual Depreciation= Cost of the Asset  Residual valueEstimated Useful Life of the Asset=$182,000$14,0006 Years=$28,000 (1)

3.

To determine

Prepare the journal entries to record the machine’s disposal under given separate assumptions.

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entries to record the machine’s disposal under given separate assumptions as follows:

(a) Machinery sold for $15,000 cash

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
 Cash 15,000 
 Accumulated Depreciation – Machinery (2) 140,000 
 Loss on disposal of Machinery (4) 27,000 
 Machinery (3)  $182,000
 (To record the loss on disposal of machinery)   

Table (5)

  • Cash is an asset, and it increases the value of assets by $15,000. Therefore, debit the cash account with $15,000.
  • Accumulated depreciation is a contra asset, and it increases the asset by $140,000. Therefore, debit Accumulated depreciation with $140,000.
  • Loss on sale of machinery is loss of the company and it decreases the value of equity by $27,000. Therefore, debit the loss on sale of machinery with $27,000.
  • Machinery is an asset, and it decreases the value of assets by $182,000. Therefore, credit machinery account by $182,000.

Working note:

Calculate the accumulated depreciation for 5 years

Accumulated Depreciation = Annual depreciation×5 years=$28,000×5 years=$140,000 (2)

Calculate the book value of machinery

Book value = Purchase cost+Capital expenditures=$178,000+$4,000=$182,000 (3)

Calculate the loss on disposal of machinery

Loss on disposal = (Book value of machinery (3) Accumulated depreciation (2) Sales value)=$182,000$140,000$15,000=$27,000 (4)

(b) Machinery is sold for $50,000 cash:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
 Cash 50,000 
 Accumulated Depreciation – Machinery (2) 140,000 
 Machinery (3)  $182,000
 Gain from sale of machinery (5)  $8,000
 (To record the gain from disposal of machinery)   

Table (6)

  • Cash is an asset, and it increases the value of assets by $50,000. Therefore, debit the cash account with $50,000.
  • Accumulated depreciation is a contra asset, and it increases the asset by $140,000. Therefore, debit Accumulated depreciation with $140,000.
  • Machinery is an asset, and it decreases the value of assets by $182,000. Therefore, credit machinery account by $182,000.
  • Gain from sale of machinery is revenue of the company and it increases the value of equity by $8,000. Therefore, debit the loss on sale of machinery with $8,000.

Working note:

Calculate the gain from disposal of machinery

Gain from disposal = (Sales value (Book value of machinery (3) Accumulated depreciation (2) ))=$50,000($182,000$140,000)=$8,000 (5)

(c) Machinery is destroyed in a fire and the insurance company pays $30,000 cash to settle the loss claim

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
 Cash 30,000 
 Accumulated Depreciation – Machinery (2) 140,000 
 Loss on Fire (6) 12,000 
 Machinery (3)  $182,000
 (To record the loss on fire)   

Table (7)

  • Cash is an asset, and it increases the value of assets by $15,000. Therefore, debit the cash account with $15,000.
  • Accumulated depreciation is a contra asset, and it increases the asset by $140,000. Therefore, debit Accumulated depreciation with $140,000.
  • Loss on fire is loss of the company and it decreases the value of equity by $12,000. Therefore, debit the loss on fire with $12,000.
  • Machinery is an asset, and it decreases the value of assets by $182,000. Therefore, credit machinery account by $182,000.

Loss on disposal = (Book value of machinery (3) Accumulated depreciation (2) Insurance claim)=$182,000$140,000$30,000=$12,000 (6)

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Chapter 8 Solutions

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Accounting for Derivatives_1.mp4; Author: DVRamanaXIMB;https://www.youtube.com/watch?v=kZky1jIiCN0;License: Standard Youtube License
Depreciation|(Concept and Methods); Author: easyCBSE commerce lectures;https://www.youtube.com/watch?v=w4lScJke6CA;License: Standard YouTube License, CC-BY