Financial Accounting Fundamentals:
Financial Accounting Fundamentals:
5th Edition
ISBN: 9780078025754
Author: John Wild
Publisher: McGraw-Hill/Irwin
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Chapter 8, Problem 24E
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Prepare the journal entries to record the disposal of the machine on January 2 under each of the given situations.

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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 the journal entries to record the disposal of the machine on January 2 under each of the given situations as follows:

Situation 1: Company B sold the machine for $18,250 cash.

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
January 2Cash 18,250 
Accumulated Depreciation –Machinery 24,625 
Loss on disposal of Machinery (1) 1,125 
     Machinery  44,000
 (To record the loss on disposal of machinery)   

Table (1)

  • Cash is an asset, and it increases the value of assets by $18,250. Therefore, debit the cash account with $18,250.
  • Accumulated depreciation is a contra asset, and it increases the asset by $24,625. Therefore, debit Accumulated depreciation with $24,625.
  • Loss on sale of machinery is loss of the company and it decreases the value of equity by $1,125. Therefore, debit the loss on sale of machinery with $1,125.
  • Machinery is an asset, and it decreases the value of assets by $44,000. Therefore, credit machinery account by $44,000.

Working note:

Calculate the loss on disposal of machinery

Loss on disposal = (Book value of machinery Accumulated depreciation Sales value)=$44,000$24,625$18,250=$1,125 (1)

Situation 2: The machine is traded in for a newer machine having a $60,200 cash price. A $25,000 trade-in allowance is received and the balance is paid in cash.

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
January 2Machinery (new) 60,200 
Accumulated Depreciation –Machinery 24,625 
Machinery (old)  44,000
Cash (2)  35,200
Gain from sale of machinery (3)  5,625
 (To record the gain from disposal of old machinery and purchase new machinery)   

Table (2)

  • Machinery is an asset, and it increases the value of assets by $60,200. Therefore, debit the machinery account with $60,200.
  • Accumulated depreciation is a contra asset, and it increases the asset by $24,625. Therefore, debit Accumulated depreciation with $24,625.
  • Machinery (old) is an asset, and it decreases the value of assets by $44,000. Therefore, credit machinery account by $44,000.
  • Cash is an asset, and it decreases the value of assets by $35,200. Therefore, credit the cash account with $35,200.
  • Gain from sale of machinery is revenue of the company and it increases the value of equity by $5,625. Therefore, debit the loss on sale of machinery with $5,625.

Working note:

Calculate the balance cash paid for purchase of new machinery

Cash= (Value of new machineryValue of trade-in allowance)=$60,200$25,000=$35,200 (2)

Calculate the gain from disposal of machinery

Gain from disposal = ((Cost of new machineryCash paid for purchase new machiney) (Book value of old machinery Accumulated depreciationCash paid (2)  ))=($60,20035,200)($44,000$24,625)=$25,000$19,375=$5,625 (3)

Situation 3: The machine is traded in for a newer machine having a $60,200 cash price. A $15,000 trade-in allowance is received and the balance is paid in cash.

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
January 2Machinery (new) 60,200 
Accumulated Depreciation -Machinery 24,625 
Loss on disposal of Machinery (5) 4,375 
     Machinery  44,000
     Cash (4)  45,200
 (To record the loss  from disposal of old machinery and purchase new machinery)   

Table (3)

  • Machinery is an asset, and it increases the value of assets by $60,200. Therefore, debit the machinery account with $60,200.
  • Accumulated depreciation is a contra asset, and it increases the asset by $24,625. Therefore, debit Accumulated depreciation with $24,625.
  • Loss on sale of machinery is loss of the company and it decreases the value of equity by $4,375. Therefore, debit the loss on sale of machinery with $4,375.
  • Machinery is an asset, and it decreases the value of assets by $44,000. Therefore, credit machinery account by $44,000.
  • Cash is an asset, and it decreases the value of assets by $45,200. Therefore, credit the cash account with $45,200.

Working note:

Calculate the balance cash paid for purchase of new machinery

Cash= (Value of new machineryValue of trade-in allowance)=$60,200$15,000=$45,200 (4)

Calculate the gain from disposal of machinery

Gain from disposal = ((Book value of old machinery Accumulated depreciationCash paid (4)  )(Cost of new machineryCash paid for purchase new machiney) )=($44,000$24,625)($60,20045,200)=$19,375$15,000=$4,375 (5)

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Chapter 8 Solutions

Financial Accounting Fundamentals:

Ch. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQCh. 8 - Prob. 11DQCh. 8 - Prob. 12DQCh. 8 - Prob. 13DQCh. 8 - Prob. 14DQCh. 8 - Prob. 15DQCh. 8 - Prob. 16DQCh. 8 - Prob. 17DQCh. 8 - Prob. 18DQCh. 8 - Prob. 19DQCh. 8 - Prob. 20DQCh. 8 - Prob. 21DQCh. 8 - Prob. 1QSCh. 8 - Prob. 2QSCh. 8 - Prob. 3QSCh. 8 - Prob. 4QSCh. 8 - QS 8-5 Computing revised depreciation On January...Ch. 8 - Prob. 6QSCh. 8 - Prob. 7QSCh. 8 - Prob. 8QSCh. 8 - Prob. 9QSCh. 8 - Prob. 10QSCh. 8 - QS 8-11 Classifying assets Identify the following...Ch. 8 - Prob. 12QSCh. 8 - Prob. 13QSCh. 8 - Prob. 14QSCh. 8 - Prob. 15QSCh. 8 - Prob. 1ECh. 8 - Prob. 2ECh. 8 - Prob. 3ECh. 8 - Prob. 4ECh. 8 - Prob. 5ECh. 8 - Prob. 6ECh. 8 - Exercise 8-7 Straight-line depreciation In early...Ch. 8 - Exercise 8-8 Double-declining-balance...Ch. 8 - Prob. 9ECh. 8 - Exercise 8-10 Double-declining-balance...Ch. 8 - Prob. 11ECh. 8 - Prob. 12ECh. 8 - Prob. 13ECh. 8 - Prob. 14ECh. 8 - Prob. 15ECh. 8 - Prob. 16ECh. 8 - Prob. 17ECh. 8 - Prob. 18ECh. 8 - Prob. 19ECh. 8 - Prob. 20ECh. 8 - Prob. 21ECh. 8 - Prob. 22ECh. 8 - Prob. 23ECh. 8 - Prob. 24ECh. 8 - Prob. 25ECh. 8 - PROBLEM SET A Problem 8-1A Plant asset costs;...Ch. 8 - Prob. 2APCh. 8 - Prob. 3APCh. 8 - Prob. 4APCh. 8 - Prob. 5APCh. 8 - Prob. 6APCh. 8 - Prob. 7APCh. 8 - Prob. 8APCh. 8 - Prob. 1BPCh. 8 - Prob. 2BPCh. 8 - Prob. 3BPCh. 8 - Prob. 4BPCh. 8 - Prob. 5BPCh. 8 - Prob. 6BPCh. 8 - Prob. 7BPCh. 8 - Prob. 8BPCh. 8 - Prob. 8SPCh. 8 - Prob. 1BTNCh. 8 - Prob. 2BTNCh. 8 - Prob. 3BTNCh. 8 - Prob. 7BTNCh. 8 - Prob. 9BTN
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