1. To determine Prepare the journal entries related to the disposal of each machine in the current year. Explanation Journal entry : Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically. Accounting rules for Journal entries: To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains. To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains. a. Prepare the journal entry related to the depreciation expense of Machine A on January 1 of the current year. As the machine was sold on January 1 itself, there was no depreciation expense for Machine A. Prepare the journal entry related to the disposal of Machine A on January 1 of the current year. Date Account title and Explanation Post Ref. Debit ($) Credit ($) January 1 Cash 5,000 Accumulated depreciation on Machine A 15,750 Loss on disposal of machine (balancing figure) 250 Equipment (Machine A) 21,000 ( To record the disposal of Machine A ) Table (1) Cash is an asset. Sale of Machine A increases the cash balance. Thus, debit cash account. Accumulated depreciation is a contra asset. It decreases the assets value. Thus, debit accumulated depreciation on Machine A account. Loss on disposal of Machine A is a component of retained earnings . Loss on disposal decreases the retained earnings. Thus, debit loss on disposal of machine account. Equipment (Machine A) is an asset. Sale of Machine A decreases the assets value. Thus, credit Equipment (Machine A) account. b. Prepare the journal entry related to the depreciation expense of Machine B on December 31 of the current year. Date Account title and Explanation Post Ref. Debit (In $) Credit (In $) December 31 Depreciation expense 4,600 Accumulated depreciation 4,600 ( To record the depreciation expense ) Table (2) Working Note: Calculate the depreciation expense for the current year. Depreciation = ( Cost of the asset − Residual value ) Estimated useful life of the asset = $ 50 , 000 − $ 4 , 000 10 years = $ 4 , 600 Depreciation expense is a component of retained earnings 2. To determine Explain the accounting rationale for the way each disposal was recorded.

10th Edition

ISBN: 9781260481563

Author: Libby, Robert

Publisher: MCGRAW-HILL HIGHER EDUCATION

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Chapter 8, Problem 6P

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Prepare the journal entries related to the disposal of each machine in the current year.

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Explain the accounting rationale for the way each disposal was recorded.

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