Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for $10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.

(a) Journal entries to update depreciation for 2018

Debit depreciation expense $500

Credit Accumulated depreciation $500

(b) Journal entries to record sales

To derecognize the asset

Debit Disposal account (p/l) $10,000

Credit asset account $10,000

To recognize the money received on disposal

Debit Cash / Accounts receivable $10,500

Credit Disposal account (p/l) $10,500

Explanation:

Given the following information on Ottawa Corporation's machinery;

Cost = $20,000 (July 1, 2014)

Depreciation per year = $2,400

Accumulated depreciation = $8,400 (at December 31, 2017)

Then, the net book value of the asset at December 31, 2017

= 20000 - 8400

= $11,600

if the machinery is sold on September 1, 2018, for $10,500

Additional Depreciation (between 1 January and 31 August 2018) would have been computed

=8/12 * 2400

= $1,600

Net book value as at September 1, 2018

= 11600 - 16000

= $10,000

Income on disposal = $10,500

Gain on disposal = $10,500 - $10,000

= $500

(a) Journal entries to update depreciation for 2018

Debit depreciation expense $500

Credit Accumulated depreciation $500

(b) Journal entries to record sales

To derecognize the asset

Debit Disposal account (p/l) $10,000

Credit asset account $10,000

To recognize the money received on disposal

Debit Cash / Accounts receivable $10,500

Credit Disposal account (p/l) $10,500