Question

Question 3 (9 marks) On January 1, 2015, Time Limited purchased a machine for $350,000. The machine was estimated to have a 10 year useful life with a residual value of $15,000. The company used the straight-line method to depreciate the machine. On December 31, 2019, the company sold the equipment for $190,000 cash Required • Calculate the gain or loss on sale on the sale of the machine. • Prepare the journal entry to recognize the sale of the machine. Requirement #1

Answer 1

1) Gain or loss on sale of Machinery

Given facts:

Cost of Machine               :               $350,000

Estimated Useful life                      :               10 years

Salvage Value after 10 years       :               $15,000

Now, we compute annual depreciation expense on the basis of following formula:-

Annual Depreciation Expenses = (Cost of Machine – Salvage )

                                                                Useful life of Machine

                                                                = ($350,000 – $15,000)

                                                                           10 years

                                                                = $335,000

                                                                    10 years

                                                                = $33,500 per year

So, Annual Depreciation Expense is $33,500 per year

The machine was sold on December 31,2019 and purchased on January 1,2015, So we will compute depreciation for 5 years to compute loss or profit on sale of machine.

So, Book Value of Assets on December 31, 2019 = Cost of Machine – Depreciation for 5 years

                                                                                                = $350,000 - $33,500 x 5years

                                                                                                = $350,000 - $167,500

                                                                                                = $182,500

So, Book Value of Assets on December 31, 2019 is $182,500

Now we compute loss or profit on sale of machine as follows:-

Loss or profit on sale of machine = Sale Value – Book Value as on December 31, 2015

                                                                = $190,000 - $182,500

                                                                = $7,500

So, Profit on sale of machine is $7,500

2) Journal Entry

Date	Account	Debit	Credit
December 31, 2015	Depreciation            Machine	33,500	33,500
December 31, 2016	Depreciation            Machine	33,500	33,500
December 31, 2017	Depreciation            Machine	33,500	33,500
December 31, 2018	Depreciation            Machine	33,500	33,500
December 31, 2019	Depreciation            Machine	33,500	33,500
December 31, 2019	Cash           Machine	190,000	190,000
December 31, 2019	Machine           Profit on sale of machine	7,500	7,500