Question

Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies it for use the next day at an $3,420 cost. On January 3, it is installed on a required operating platform costing $1,080, and it is further readied for operations. The company predicts the machine will be used for six years and have a $14,600 residual 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. 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 2. Prepare journal entries to record depreciation of the machine at December 31 of (a) its first year in operations and (b) the year of its disposal. 3. Prepare journal entries to record the machine's disposal under each of the following separate assumptions: (a) it is sold for $13,500 cash; (b) it is sold for $45,000 cash; and (c) it is destroyed in a fire and the insurance company pays $24,000 cash to settle the loss claim.

Plz give me a clear answer

Answer 1

Answer with working is given below

please note depreciation can either be credited to Machine Account or accumulated in Accumulated Depreciation Account

Accordingly answer is given both ways.

1. Credit Debit $167,000 Date Journal 02-Jan-02 Machine Account To Cash (Being purchase of machine in cash) $167,000 $3,420 $3,420 03-Jan-02 Machine Account To Cash (Being additional cost incurred For making machine ready) $1,080 03-Jan-02 Machine Account To Cash (Being additional installation $1,080 Cost) Depreciation calculation Total cost of machine Salvage value Net depreciable value Number of years Depreciation per year $171,500 $14,600 $156,900 $26,150 Depreciation first year Debit Credit Debit Credit Journal Depreciation for first year depreciation Account TO Accumulated Depreciation (Being depreciation recorded) Alternate answer Journal Depreciation for first year Depreciation Account To Machine Account (Being depreciation recorded) $26,150 $26,150 $26,150 $26,150 $26,150 $26,150 Depreciation for fifth year depreciation Account TO Accumulated Depreciation (Being depreciation recorded) Depreciation for fifth year Depreciation Account To Machine Account (Being depreciation recorded) $26,150 $26,150 It is assumed for first year Depreciation is calculated for full year Note : Depreciation entries are routed through Accumulated Depreciation Account Instead it can be directly taken to Machine Account Case a) Case b) Case c) Book Value $171,500 $171,500 $171,500 Accumulated Depreciation for 5 years $130,750 $130,750 $130,750 Net Book value end of 5th year $40,750 $40,750 $40,750 Sale value $13,500 $45,000 $24,000 Loss/(Profit) on Sale $27,250 $4,250 $16,750 Credit Debit $13,500 $27,250 Case a) Journal Entries Journal Cash Account Loss on Sale of Machine To Machinery Account (Being Sale of machine recorded) Accumulated depreciation To Machinery Account (Being accumulated depreciation on machinery) $40,750 $130,750 If Accmulated Depreciation Account is not used this entry is not neede $130,750 Credit Debit $45,000 Case b) Journal Entries Journal Cash Account To Machinery Account To Profit on Sale of Machine (Being Sale of machine recorded) Accumulated depreciation To Machinery Account (Being accumulated depreciation on machinery) $40,750 $4,250 $130,750 If Accmulated Depreciation Account is not used this entry is not neede $130,750 Credit Debit $24,000 $16,750 $40,750 Case c) Journal Entries Journal Cash Account Loss on Fire To Machinery Account (Being machine destroyed in Fire and insurance money received) Accumulated depreciation To Machinery Account (Being accumulated depreciation on machinery) $130,750 If Accmulated Depreciation Account is not used this entry is not neede $130,750