Chapter 10, Problem 5BPSB

To determine

Introduction:

Asset is a term used to define a resource owned by a company against which some income will earn in near future and that income will expressed in monetary terms. Recording of an asset is done via journal entry and represented in Balance sheet as an Asset.

Depreciation is a term used to indicate reduction in value of assets occurred due to frequent use, wear and tear, changes in technology etc. it is recorded in statement of accounts as expenditure however there is no outflow of cash.

Straight line method is a method to be used for computing depreciation using Formula under which cost of asset is depreciated equally over the useful life of asset.

To determine:

Journalize the entries of the events occurred

Explanation of Solution

Journal entry will be recorded as under:

In the books of York instruments

			$	$
01.01.2014	Machine A/c	Dr.	114270
	To Cash A/c	Cr.		114270
	(Being asset recorded)
31.12.2014	Depreciation Expense A/c	Dr.	17425
	To Accumulated Depreciation A/c	Cr.		17425
	(Being Depreciation on Asset (Machine) recorded)
31.12.2015	Depreciation Expense A/c	Dr.	27500
	To Accumulated Depreciation A/c	Cr.		27500
	(Being Depreciation on Asset (Machine) recorded)
31.12.2016	Depreciation Expense A/c	Dr.	27500
	To Accumulated Depreciation A/c	Cr.		27500
	(Being Depreciation on Asset (Machine) recorded)
31.12.2016	Cash A/c	Dr.	25240
	Loss on sale of Machine A/c	Dr.	16605
	To Machine A/c	Cr.		41845
	(Being Machine sold in cash recorded)

Explanation:

Year 2014

Given:

Cost of Asset for the year 2014 is $ 114270,
Residual value is $ 9720,
Useful life of Copy machine is 6 Years

Formula used:

For computation of cost of Machine

Cost of Machine	$
Original value of asset at the beginning of year	xxxx
Add: Expenditure capitalized during the year	xxxx
Less: Depreciation for the year	xxxx
Asset value at the end of year	xxxx

For calculating Depreciation under straight line method

Cost of Asset- Residual Value
Useful life of Asset

Calculation:

*Computation of Cost of Machine

Cost of Machine	$
Cash	107800
Sales tax	6470
Total	114270

$ 114270- $ 9720
    6
$ 104550/6
$ 17425

Year 2015

Given:

Cost of Asset for the year 2015 is $ 96845,
Residual value is $ 14345,
Useful life of machine reduced from 6 years to 4 years, as one year already passed so remaining useful life is 3 years in the year 2015

Formula used:

For computation of cost of Machine

Cost of Machine	$
Original value of asset at the beginning of year	xxxx
Add: Expenditure capitalized during the year	xxxx
Less: Depreciation for the year	xxxx
Asset value at the end of year	xxxx

For calculating Depreciation under straight line method

Cost of Asset- Residual Value
Useful life of Asset

Calculation:

*Computation of Cost of Machine

Cost of Machine	$
Asset value in the year 2014	114270
Less: Depreciation for the year 2014	17425
Asset value at the beginning of year 2015	96845

$ 96845- $ 14345
    3
$ 82500/3
$ 27500

Year 2016

Given:

Cost of Asset for the year 2016 is $ 69345,
Residual value is $ 14345,
Remaining useful life of Machine is 2 years in year 2016

Formula used:

Formula for computation of cost of machine

Cost of Machine	$
Original value of asset at the beginning of year	xxxx
Less: Depreciation for the year	xxxx
Asset value at the end of year	xxxx

For calculating Depreciation under straight line method

Cost of Asset- Residual Value
Useful life of Asset

For calculating profit or loss on sale of asset

Calculation of profit or loss on sale of asset	$
Original value of asset	xxxx
Less: Depreciation for the used period	xxxx
Asset value at the time of sale	xxxx
Less: Sale value	xxxx
Profit / Loss on sale of Asset	xxxx

Calculation:

*Computation of Cost of Machine

Cost of Machine	$
Asset value in the year 2015	96845
Less: Depreciation for the year 2015	27500
Asset value at the beginning of year 2016	69345

$ 69345- $ 14345
    2
$ 55000/2
$ 27500

*Computation of Cost of Machine at the time of sale

Cost of Machine	$
Truck value at the beginning of year 2016	69345
Less: Depreciation for the year 2016	27500
Truck value at the time of sale	41845
Sale of Truck in Cash	25240
Loss on sale of Machine ($ 41845- $ 25240)	16605*

*Loss on sale of truck will be recorded as expenses under Profit & Loss A/c

Conclusion

Events and transaction are recorded in the form of journal entries as and when it occurred.