Question

(The following information applies to the questions displayed below.) Saturn Co. purchases a used machine for $192,000 cash on January 2 and readies it for use the next day at an $10,000 cost. On January 3, it is installed on a required operating platform costing $2,000, and it is further readied for operations. The company predicts the machine will be used for six years and have a $23,040 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of. value: 7.00 points Required: 1. Prepare journal entries to record the machine's purchase and the costs to ready and install it. Cash is paid for all costs incurred. (Omit the "$" sign in your response.) Date Debit Credit Jan. 2 General Journal Machinery purchase cost (Click to select) (Click to select) Preparation cost (Click to select) Jan. 3 (Click to select) Operating platform cost (Click to select) Jan. 3 (Click to select)

Answer 1

The total cost of machine will include the purchase price as well as all the expenses made to bring the machine to its place of use and expenses made to put the machine to use.

Here Preparation Cost and Operation Platform Cost will be debited to the cost of machine as machine was just ready to use but not put to use before spending for these charges. These charges are required so as to put the machine to its use.

Annual depreciation as per straight line basis method = (Total cost - Salvage value ) / Useful life in years

In this case:

Annual depreciation as per straight line basis method = ( $ 204,000 -23,040) / 6

= $ 30,160

Based on the information and calculations made above, book value of machine can be calculated as under:

Particulars	Amount
Total purchase cost	$                  204,000
Depreciation for 1st year	$                    30,160
Book value as at the end of 1st year	$                  173,840
Depreciation for 2nd year	$                    30,160
Book value as at the end of 2nd year	$                  143,680
Depreciation for 3rd year	$                    30,160
Book value as at the end of 3rd year	$                  113,520
Depreciation for 4th year	$                    30,160
Book value as at the end of 4th year	$                    83,360
Depreciation for 5th year	$                    30,160
Book value as at the end of 5th year	$                    53,200

Required Journal entries are as under:

Sr. No.	Date	General Journal	Debit	Credit
1		Machinery purchase cost
	Jan.2	Machine A/c	$        192,000
		To Cash A/c		$        192,000
		(being machine purchased)
		Preparation cost
	Jan.3	Machine A/c	$          10,000
		To Cash A/c		$          10,000
		(being preparation cost paid for machine purchased on Jan.2)
		Operating platform cost
	Jan.3	Machine A/c	$            2,000
		To Cash A/c		$            2,000
		(being operating platform built for the machine purchased on Jan.2)
2		Depreaciation for 1st year of operation
a	Dec.31	Depreciation on Machine A/c	$          30,160
		To Accumulated Depreciation A/c		$          30,160
		(being depreciation provided for the year on machine purchased on Jan.2)
		Depreaciation for the year of disposal
b	Dec.31	Depreciation on Machine A/c	$          30,160
		To Accumulated Depreciation A/c		$          30,160
		(being depreciation provided for the year on machine purchased on Jan.2)
3		If machine sold for $ 24,500 cash
a	Dec.31	Cash A/c	$          24,500
		Accumulated depreciation A/c	$        150,800
		Loss on sale of Machine	$          28,700
		To Machine A/c		$        204,000
		(being machine sold for cash)
		If machine sold for $ 98,000 cash
b	Dec.31	Cash A/c	$          98,000
		Accumulated depreciation A/c	$        150,800
		To Profit on sale of Machine		$          44,800
		To Machine A/c		$        204,000
		(being machine sold for cash)
		If machine is destroyed in fire & Insurance Co. pays $ 35,000 cash to settle the claim
c	Dec.31	Cash A/c	$          35,000
		Accumulated depreciation A/c	$        150,800
		Loss on disposal of Machine	$          18,200
		To Machine A/c		$        204,000
		(being machine destroyed in fire, claim received in cash)

Explanation:

As already discussed and explained above, Preparation Cost and Operation Platform Cost will be debited to the cost of machine as machine.

Machine was used for 5 years hence depreciation will be recorded for all the 5 years.

Book value at the end of 5th year is $ 53,200 as calculated in the table shown above.

Profit / (loss) on sale/ disposal of asset = Sale value (or Claim value) - Book value

here for case 3 (a) machine sold for $ 24,500 cash

Profit / (loss) on sale/ disposal of asset = $ 24,500 - 53,200 = ($ 28,700) loss

On the same lines Profit / (loss) on sale/ disposal of asset is calculated for 3 (b) 7 3 (c)

Accumulated depreciation for 5 years = $ 30,160 * 5 = $ 150,800