College Accounting, Chapters 1-27
College Accounting, Chapters 1-27
23rd Edition
ISBN: 9781337794756
Author: HEINTZ, James A.
Publisher: Cengage Learning,
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Textbook Question
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Chapter 18, Problem 11SPA

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 accumulated depreciation of $2,800, was discarded.
  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 journal entries for the transactions.

Expert Solution & Answer
Check Mark
To determine

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:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
January1Accumulated Depreciation–Motor 122,800
Motor 122,800
(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.

Gain (loss) on discarded asset = Cost–Accumulated depreciation= $2,800–$2,800= $0

Transaction on January 8:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
January8Cash200
Accumulated Depreciation–Motor 84,000
Loss on Sale of Motor 8200
Motor 84,400
(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.

Book value = Cost–Accumulated depreciation= $4,400–$4,000= $400

Working Note (3):

Compute gain or loss on sale of asset.

Gain (loss )= Sale proceeds – Book value= $200 – $400= $(400)

Note: Refer to Working Note 2 for value and computation of book value.

Transaction on January 14:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
January14Cash450
Accumulated Depreciation–Motor 165,400
Motor 185,600
Gain on Sale of Motor 16250
(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.

Book value = Cost–Accumulated depreciation= $5,600–$5,400= $200

Working Note (5):

Compute gain or loss on sale of asset.

Gain (loss )= Sale proceeds – Book value= $450 – $200= $250

Note: Refer to Working Note 4 for value and computation of book value.

Transaction on February 1:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
February1Motor 22 (New)7,000
Accumulated Depreciation–Motor 6 (Old)4,800
Motor 6 (Old)6,000
Cash5,600
Gain on Exchange of Motors200
(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.

Book value = {Cost of old asset–Accumulated depreciation of old asset}= $6,000–$4,800= $1,200

Working Note (7):

Compute trade-in-allowance.

Trade-in-allowance = Market value of new motor–Cash paid=$7,000–$5,600=$1,400

Working Note (8):

Compute gain (loss) on exchange of asset.

Gain (loss) on exchange = {Trade-in-allowance –Book value of old asset }= $1,400 – $1,200= $200

Note: Refer to Working Notes 6 and 7 for value and computation of both values.

Transaction on February 9:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
February9Motor 23 (New)6,500
Accumulated Depreciation–Motor 9 (Old)5,000
Loss on Exchange of Motors200
Motor 9 (Old)5,500
Cash6,200
(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.

Book value = {Cost of old asset–Accumulated depreciation of old asset}= $5,500–$5,000= $500

Working Note (10):

Compute trade-in-allowance.

Trade-in-allowance = Market value of new motor–Cash paid=$6,500–$6,200=$300

Working Note (11):

Compute gain (loss) on exchange of asset.

Gain (loss) on exchange = {Trade-in-allowance –Book value of old asset }= $300 – $500= $(200)

Note: Refer to Working Notes 9 and 10 for value and computation of both values.

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Students have asked these similar questions
Disposition of Assets: Journalizing Mitchell Parts Co. had the following plant asset transactions during the year: 1. Assets discarded or sold: Motor #12, which had a cost of $2,800 and accumulated depreciation of Jan. 1 $2,800, was discarded. Motor #8, which had a cost of $4,400 and accumulated depreciation of $4,000, 8 was sold for $200. Motor #16, which had a cost of $5,600 and accumulated depreciation of 14 $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. ° 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 journal entries for the transactions. Page: 1 DOC. POST NO. REF.…
Journal Entries: Disposition of Plant Assets 1.  Discarding an asset. On January 4, shelving units, which had a cost of $6,360 and had accumulated depreciation of $5,790, were discarded. On June 15, a hand cart, which had a cost of $1,430 and had accumulated depreciation of $1,310, was sold for $120. On October 1, a copy machine, which had a cost of $7,740 and had accumulated depreciation of $7,250, was sold for $550. If an amount box does not require an entry, leave it blank. Prepare the entries for the transactions using a general journal. 2.  Exchange or trade-in of assets. On December 31, a drill press, which had a cost of $59,990 and had accumulated depreciation of $48,910, was traded in for a new drill press with a fair market value of $74,250. The old drill press and $65,170 in cash were given for the new drill press. On December 31, the old drill press in (a) and $60,430 in cash were given for the new drill press. If an amount box does not require an entry, leave it blank.…
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Chapter 18 Solutions

College Accounting, Chapters 1-27

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