Chapter 8, Problem 6PSA

To determine

Journal Entries:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

• To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

1.

To prepare: Journal entries.

Explanation of Solution

Record cost of machine purchased.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Jan 2	Machine		178,000
	Cash			178,000
	(To record the cash purchases)

Table (1)

• Machine is an asset account. Machine account increases as the new machine is bought to the business, hence the asset increases and all the assets are debited as their values increases.
• Cash account is an asset account. Cash account decreases as the amount paid to purchase the equipment has been paid in cash, hence the asset decreases and all the assets are credited as their values decreases.

Record Additional cost spent on machinery in order to put it to use.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Jan 3	Machine		2,840
	Cash			2,840
	(To record the additional cost)

Table (2)

• Machine is an asset account. Machine account increases as the new machine is bought to the business, hence the asset increases and all the assets are debited as their values increases.
• Cash account is an asset account. Cash account decreases as the amount paid to purchase the equipment has been paid in cash, hence the asset decreases and all the assets are credited as their values decreases.

Record additional cost

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Jan 3	Machine		1,160
	Cash			1,160
	(To record the additional cost)

Table (3)

• Machine is an asset account. Machine account increases as the new machine is bought to the business, hence the asset increases and all the assets are debited as their values increases.
• Cash account is an asset account. Cash account decreases as the amount paid to purchase the equipment has been paid in cash, hence the asset decreases and all the assets are credited as their values decreases.

Working Notes:

Computation of total cost of machinery:

  $\begin{array}{c}\text{Total}\text{Cost}=\left(\begin{array}{l}\text{Cost}\text{of}\text{machine}+\text{Additional}\text{Cost}\text{spent}\text{to}\text{put}\text{to}\text{use}\text{the}\text{asset}\\ +\text{Additional}\text{cost}\end{array}\right)\\ =\$178,000+\$2,840+\$1,160\\ =\$182,000\end{array}$

Total cost of asset is $182,000.

2.

To determine

To prepare: Journal entries.

Explanation of Solution

(a)

Record depreciation in the first year.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31	Depreciation		28,000
	Accumulated Depreciation			28,000
	(To record the depreciation)

Table (4)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and increases as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

The total value of machine is $182,000.

Computation of depreciation:

  $\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$182,000-\$14,000}{6}\\ =\$28,000\end{array}$

Depreciation that will be charged in first year is $28,000.

(b)

Record depreciation in the year of disposal.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31	Depreciation		28,000
	Accumulated Depreciation			28,000
	(To record the depreciation)

Table (4)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and increases as the depreciation is transferred to this account. This is the reason it is credited.

The depreciation will remain the same throughout the five years as the method used for depreciation is straight line depreciation. Here, depreciation amount of depreciation remains the same throughout.

3.

To determine

To prepare: Journal entries.

Explanation of Solution

(a)

Record the entry for sale of asset for $15,000.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31	Cash		15,000
	Loss on disposal of machine		27,000
	Accumulated Depreciation		140,000
	Machinery			182,000
	(To record the sale of the asset)

Table (5)

• Cash is an asset account. Cash account increases as the cash has been received by the company on the sale of the asset, hence the asset increases and all the assets are debited as their values increases.
• Loss on disposal is an expense account. Loss account is increasing and is debited as all the expenses and losses are debited according to the rules.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and decreases as the account has been closed as the asset has been sold off. This is the reason it is debited.
• Machine is an asset account. Machine account decreases as the as the asset has been disposed off and all the assets are credited as their values decrease.

Working notes:

Computation of Accumulated Depreciation:

  $\begin{array}{c}\text{Accumulated}\text{Depreciation}=\text{Depreciation}\times \text{Useful}\text{life}\\ \text{=\$28,000}\times \text{5}\text{years}\\ \text{=\$140,000}\end{array}$

Accumulated Depreciation is $140,000.

Computation of the book value of the asset:

  $\begin{array}{c}\text{Book}\text{value}=\text{Actual}\text{cost}\text{of}\text{machine}-\text{Accumulated}\text{depreciation}\\ =\$182,000-\$140,000\\ =\$42,000\end{array}$

Book value of the asset is $42,000.

Computation of loss on sale of asset:

  $\begin{array}{c}\text{Loss}\text{on}\text{Sale}=\text{Cash}\text{recieved}-\left(\text{Cost}-\text{Accumulated}\text{depreciation}\right)\\ =\$15,000-\left(\$182,000-\$140,000\right)\\ =\$15,000-\$42,000\\ =\left(\$27,000\right)\end{array}$

Hence, loss on sale of asset is $27,000.

b()

Record the sale of asset for $50,000.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31	Cash		50,000
	Accumulated Depreciation		140,000
	Gain on sale			8,000
	Machinery			182,000
	(To record the sale of the asset)

Table (6)

• Cash is an asset account. Cash account increases as the cash has been received by the company on the sale of the asset, hence the asset increases and all the assets are debited as their values increases.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and decreases as the account has been closed as the asset has been sold off. This is the reason it is debited.
• Machine is an asset account. Machine account decreases as the as the asset has been disposed off and all the assets are credited as their values decrease.
• Gain on sale is an income account. Gain account increases and is credited as all the income and gains are credited as per the rules of accounts.

Working Notes:

Computation of gain on sale:

  $\begin{array}{c}\text{Gain}\text{on}\text{Sale}=\text{Cash}\text{recieved}-\left(\text{Cost}-\text{Accumulated}\text{depreciation}\right)\\ =\$50,000-\left(\$182,000-\$140,000\right)\\ =\$50,000-\$42,000\\ =\$8,000\end{array}$

Gain on sale of asset is $8,000.

c

Record the entry for Asset destroyed in fire and collected $30,000 cash.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31	Cash		30,000
	Loss by fire		12,000
	Accumulated Depreciation		140,000
	Machinery			182,000
	(To record the sale of the asset)

Table (7)

• Cash is an asset account. Cash account increases as the cash has been received by the company on the sale of the asset, hence the asset increases and all the assets are debited as their values increases.
• Loss by fire is an expense account. Loss account is increasing and is debited as all the expenses and losses are debited according to the rules.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and decreases as the account has been closed as the asset has been sold off. This is the reason it is debited.
• Machine is an asset account. Machine account decreases as the as the asset has been disposed off and all the assets are credited as their values decrease.

Working Notes:

Computation of the loss by fire:

  $\begin{array}{c}\text{Loss}\text{by}\text{Fire}=\text{Cash}\text{recieved}-\left(\text{Cost}-\text{Accumulated}\text{depreciation}\right)\\ =\$30,000-\left(\$182,000-\$140,000\right)\\ =\$30,000-\$42,000\\ =\left(\$12,000\right)\end{array}$

Hence, the loss by fire is $12,000.