DISPOSITION OF ASSETS: JOURNALIZING Mitchell Parts Co. had the following plant asset transactions during the year:
1. Assets discarded or sold:
Jan. | 1 | Motor #12, which had a cost of $2,800 and |
8 | Motor #8, which had a cost of $4,400 and accumulated depreciation of $4,000, was sold for $200. | |
14 | Motor #16, which had a cost of $5,600 and accumulated depreciation of $5,400, was sold for $450. |
2. Assets exchanged or traded in:
Feb. | 1 | Motor #6, which had a cost of $6,000 and accumulated depreciation of $4,800, was traded in for a new motor (#22) with a fair market value of $7,000. The old motor and $5,600 in cash were given for the new motor. |
9 | Motor #9, which had a cost of $5,500 and accumulated depreciation of $5,000, was traded in for a new motor (#23) with a fair market value of $6,500. The old motor and $6,200 in cash were given for the new motor. |
REQUIRED
Prepare general
Journalize the transactions related to plant assets in the books of Corporation MP.
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Journalize the transactions related to plant assets in the books of Corporation MP.
Transaction on January 1:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
January | 1 | Accumulated Depreciation–Motor 12 | 2,800 | |||
Motor 12 | 2,800 | |||||
(Record discarding of Motor 12) |
Table (1)
Description:
- Accumulated Depreciation–Motor 12 is a contra-asset account. Since the motor is discarded, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
- Motor 12 is an asset account. Since motor is discarded, asset account decreased, and a decrease in asset is credited.
Working Note 1:
Determine the gain or loss recognized on the discarding of asset.
Transaction on January 8:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
January | 8 | Cash | 200 | |||
Accumulated Depreciation–Motor 8 | 4,000 | |||||
Loss on Sale of Motor 8 | 200 | |||||
Motor 8 | 4,400 | |||||
(Record sale of Motor 8) |
Table (2)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Accumulated Depreciation–Motor 8 is a contra-asset account. Since the motor is sold, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
- Loss on Sale of Motor 8 is an expense account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Motor 8 is an asset account. Since motor is sold, asset account decreased, and a decrease in asset is credited.
Working Note (2):
Compute book value of asset on the date of sale.
Working Note (3):
Compute gain or loss on sale of asset.
Note: Refer to Working Note 2 for value and computation of book value.
Transaction on January 14:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
January | 14 | Cash | 450 | |||
Accumulated Depreciation–Motor 16 | 5,400 | |||||
Motor 18 | 5,600 | |||||
Gain on Sale of Motor 16 | 250 | |||||
(Record sale of Motor 16) |
Table (3)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Accumulated Depreciation–Motor 16 is a contra-asset account. Since the motor is sold, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
- Motor 16 is an asset account. Since motor is sold, asset account decreased, and a decrease in asset is credited.
- Gain on Sale of Motor 16 is a revenue account. Since gains and revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Note (4):
Compute book value of asset on the date of sale.
Working Note (5):
Compute gain or loss on sale of asset.
Note: Refer to Working Note 4 for value and computation of book value.
Transaction on February 1:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
February | 1 | Motor 22 (New) | 7,000 | |||
Accumulated Depreciation–Motor 6 (Old) | 4,800 | |||||
Motor 6 (Old) | 6,000 | |||||
Cash | 5,600 | |||||
Gain on Exchange of Motors | 200 | |||||
(Record exchange of old motor for a new motor) |
Table (4)
Description:
- Motor 22 (New) is an asset account. Since new machine is brought into the business, asset account increased, and an increase in asset is debited.
- Accumulated Depreciation– Motor 6 (Old) is a contra-asset account. Since the machine is sold, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
- Motor 6 (Old) is an asset account. Since old machine is exchanged, asset account decreased, and a decrease in asset is credited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
- Gain on Exchange of Motors is a revenue account. Since gains and revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Note (6):
Compute book value of old asset on the date of exchange.
Working Note (7):
Compute trade-in-allowance.
Working Note (8):
Compute gain (loss) on exchange of asset.
Note: Refer to Working Notes 6 and 7 for value and computation of both values.
Transaction on February 9:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
February | 9 | Motor 23 (New) | 6,500 | |||
Accumulated Depreciation–Motor 9 (Old) | 5,000 | |||||
Loss on Exchange of Motors | 200 | |||||
Motor 9 (Old) | 5,500 | |||||
Cash | 6,200 | |||||
(Record exchange of old motor for a new motor) |
Table (5)
Description:
- Motor 23 (New) is an asset account. Since new machine is brought into the business, asset account increased, and an increase in asset is debited.
- Accumulated Depreciation– Motor 9 (Old) is a contra-asset account. Since the machine is sold, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
- Loss on Exchange of Motors is an expense account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Motor 9 (Old) is an asset account. Since old machine is exchanged, asset account decreased, and a decrease in asset is credited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Note (9):
Compute book value of old asset on the date of exchange.
Working Note (10):
Compute trade-in-allowance.
Working Note (11):
Compute gain (loss) on exchange of asset.
Note: Refer to Working Notes 9 and 10 for value and computation of both values.
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