Question

Question #3 (20 points) On January 1, Walker purchases a used machine for $150,000 and readies it for use the next day at a cost of $3,510. On January 4, it is mounted on a required operating platform costing $4,600, and it is further readied for operations. Management estimates the machine will be used for seven years and have an $18,110 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its sixth year of use, the machine 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 $28,000 cash: (b) it is sold for S52,000 cash; and (c) it is destroyed in a fire and the insurance company pays $25,000 cash to settle the loss claim.

Answer 1

	Cost of machine
	purchase price				150,000
	Ready to use				3,510
	cost of operating platform				4,600
	Total cost of machine				158,110
	Depreciation expense = (158,110-18,110)/7
			20000
1)	Date	Accounting titles & explanations				Debit	Credit
	2-Jan	Machine				150,000
		cash					150,000
		Machine				3,510
		cash					3,510
		machine				4,600
		cash					4,600
2)-a)	31-Dec	Depreciation expense				20,000
		Accumulated depreciation					20,000
	year 6	entry for sixth year depreciation)
2-b)	31-Dec	Depreciation expense				20,000
		Accumulated depreciation					20,000
3)	31-Dec	Cash				28,000
		Accumulated dep		(20000*6)		120000
		loss on sale of machine				10,110
		Machine					158,110
	31-Dec	Cash				52,000
		Accumulated dep				120000
		Gain on sale of machine					13,890
		Machine					158,110
	31-Dec	Cash				25,000
		Accumulated dep				120000
		loss on disposal				13,110
		Machine					158,110