Onslow Co. purchases a used machine for $192.000 cash on January 2 and readies it for use the next day at a $10,000 cost. On January 3, it is installed on a required operating platform costing $2,000, and it is further readied for operations. The company predicts the machine will be used for six years and have a $23,040 salvage 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 disposal under each of the following separate assumptions:

a. Record the sale of the used machine for $21,000 cash.

b. Record the sale of the used machine for $84,000 cash.

c. Record the insurance settlement received of $31,500 resulting from the total destruction of the machine in a fire.

a. Debit Other income/disposal account (p/l) $204,000

Credit Asset account $204,000

Being entries to derecognize cost of asset on disposal

Debit Accumulated depreciation account $150,800

Credit Other income/disposal account (p/l) $150,800

Being entries to derecognize the accumulated depreciation of asset as at date of disposal

Debit Cash account $21,000

Credit Other income/disposal account (p/l) $21,000

Being entries to record amount received on disposal of asset

b. Debit Other income/disposal account (p/l) $204,000

Credit Asset account $204,000

Being entries to derecognize cost of asset on disposal

Debit Accumulated depreciation account $150,800

Credit Other income/disposal account (p/l) $150,800

Being entries to derecognize the accumulated depreciation of asset as at date of disposal

Debit Cash account $84,000

Credit Other income/disposal account (p/l) $84,000

c. Debit Other income/disposal account (p/l) $204,000

Credit Asset account $204,000

Debit Accumulated depreciation account $150,800

Credit Other income/disposal account (p/l) $150,800

Being entries to derecognize the accumulated depreciation of asset as at date of destruction of machine by fire

Debit Cash account $31,500

Credit Other income/disposal account (p/l) $31,500

Being entries received on the insurance settlement

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value) / Estimated useful life

When the amount received from the disposal of an asset is higher than the carrying value of the asset, the company makes a gain on disposal. The proceed from the disposal of an asset may be recorded in the disposal or other income account.

On disposal, the carrying amount of the asset is derecognized by

Debit Other income/disposal account (p/l)

Credit Asset account

with the cost of the asset, then,

Debit Accumulated depreciation account

Credit Other income/disposal account (p/l)

With the accumulated depreciation of the asset at the date of disposal,

Furthermore,

Debit Cash account

Credit Other income/disposal account (p/l)

with the amount received from the disposal or sale of the asset

Total cost = $192000 + $10000 + $2000

= $204,000

Depreciation

= ($192000 + $10000 + $2000 - $23040) / 6

= $30,160

Accumulated depreciation at the end of its fifth year

= 5 * $30,160

= $150,800

Onslow co.

Journal entries

a. Cash Debit $ 21,000

Accumulated depreciation Debit $ 150,160

Loss on sales of machine Debit $ 32,840

Machine Credit $ 204,000

To record sale of machine for $ 21,000 cash

b. Cash Debit $ 84,000

Accumulated depreciation Debit $ 150,160

Gain on sales of machine Credit $ 30,160

Machine Credit $ 204,000

To record sale of machine for $ 84,000 cash

c. Cash Debit $ 31,500

Accumulated depreciation Debit $ 150,160

Loss on sales of machine Debit $ 22,340

Machine Credit $ 204,000

To record insurance settlement on machine destroyed by fire

Explanation:

Computation of depreciable cost

Cost of machine $ 192,000

Cost to ready for use $ 10,000

Cost of platform $ 2,000

Total cost of machine ready for use $ 204,000

Less: Salvage value $ (23,040)

Depreciable cost $ 180,960

Estimated useful life 6 years

Annual depreciation $ 30,160

Net book value after 5 years of operations

Cost $ 204,000

Depreciation for 5 years ($ 30,160 * 5 years) $ 150,800

Net book value after 5 years $ 53,200