Chapter 8, Problem 24E

To determine

Prepare the journal entries to record the disposal of the machine on January 3 under each of the given situations.

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 3 under each of the given situations as follows:

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

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 2	Cash		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

$\begin{array}{c}\text{Loss on disposal = }\left(\begin{array}{l}\text{Book value of machinery}-\text{ Accumulated depreciation }\\ -\text{Sales value}\end{array}\right)\\ =\$44,000-\$24,625-\$18,250\\ =\$1,125\end{array}$ (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.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 2	Machinery (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

$\begin{array}{c}\text{Cash}=\left(\begin{array}{l}\text{Value of new machinery}-\\ \text{Value of trade-in allowance}\end{array}\right)\\ =\$60,200-\$25,000\\ =\$35,200\end{array}$ (2)

Calculate the gain from disposal of machinery

$\begin{array}{c}\text{Gain from disposal = }\left(\begin{array}{l}\left(\begin{array}{l}\text{Cost of new machinery}-\\ \text{Cash paid for purchase }\\ \text{new machiney}\end{array}\right)-\\ \left(\begin{array}{l}\text{Book value of old machinery}-\\ \text{ Accumulated depreciation}-\text{Cash paid (2) }\end{array}\right)\end{array}\right)\\ =\left(\$60,200-35,200\right)-\left(\$44,000-\$24,625\right)\\ =\$25,000-\$19,375\\ =\$5,625\end{array}$ (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.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 2	Machinery (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

$\begin{array}{c}\text{Cash}=\left(\begin{array}{l}\text{Value of new machinery}-\\ \text{Value of trade-in allowance}\end{array}\right)\\ =\$60,200-\$15,000\\ =\$45,200\end{array}$ (4)

Calculate the gain from disposal of machinery

$\begin{array}{c}\text{Gain from disposal = }\left(\begin{array}{l}\left(\begin{array}{l}\text{Book value of old machinery}-\\ \text{ Accumulated depreciation}-\text{Cash paid (4) }\end{array}\right)-\\ \left(\begin{array}{l}\text{Cost of new machinery}-\\ \text{Cash paid for purchase }\\ \text{new machiney}\end{array}\right)\end{array}\right)\\ =\left(\$44,000-\$24,625\right)-\left(\$60,200-45,200\right)\\ =\$19,375-\$15,000\\ =\$4,375\end{array}$ (5)