Question

On July 1, Year 1, Yellow Rose Corp. paid $25,000 cash for a machine and paid an additional 8% sales tax. On the same date, an electrician was paid $1,000 to install custom switches to enhance the functionality of the machine. Yellow Rose estimates a five-year useful life, uses straight-line depreciation, and expects a $2,000 salvage value. The machine was placed in service on October 1, Year 1. Yellow Rose has a calendar year-end.

On December 31, Year 2, the machine was sold for $14,000 cash. Depreciation expense for Year 2 was properly recorded.

Use the data above to prepare each of the journal entries for Yellow Rose specified below.

1. Prepare the journal entry to record the cost of the machine.

2. Prepare the journal entry to record the Year 1 depreciation for the machine.

3. Prepare the journal entry to record the sale of the machine.

Answer 1

	WOKRING NOTES: 1
		CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD FOR MACHINE
		Purchase Cost of Machine	$                      25,000
		Add: GST 8% = $ 25,000 X 8% =	$                        2,000
		Add: Install of Customer Switches	$                        1,000
		Total Cost of Machine	$                      28,000
		Less: Salvage Value	$                        2,000
		Net Value for Depreciation	$                      26,000
		Usefule life of the Machine	5	Years
		Depreciation per year = Value for Depreciation / 5 years =	5,200
		Total Depreciation Per year =	5,200
	WOKRING NOTES: 2
		CALCULATION OF B.V OF MACHINE AS ON END OF YEAR 2 AND GAIN OR LOSS ON SALE
		Total Cost Of Machine	$                      28,000
		Less:
		Depreciation for the year 1 = $ 5,200 X 3 / 12	$                        1,300
		Depreciation for the year 2	$                        5,200
		Total Depreciation	$                        6,500
		Book value at the end of Year 2	$                      21,500
		Less: Sale value	$                      14,000
		Loss on Sale of Machinary	$                        7,500
	SOLUTION :
	Journal Entries
	Transaction	Account Title and explanation	Debit	Credit
	"1"	Machine (25,000 + $ 2,000 + $ 1,000)	$                      28,000
		Cash		$                    28,000
	"2"	Depreciation Expenses	$                        1,300
		Accumulated Depreciation - Machinary		$                       1,300
	"3"	Cash	$                      14,000
		Loss on Sale of Machinary	$                        7,500
		Accumulated Depreciation - Machinary	$                        6,500
		Machinary		$                    28,000