Blueprint Problem: Disposal of Fixed Assets Assume that you are the accountant f
ID: 2339993 • Letter: B
Question
Blueprint Problem: Disposal of Fixed Assets Assume that you are the accountant for fotkin Manufacturing. The company purchased a machine on January 1, 2009, for $40,000, useful sfe to be five years and the residual value to be $4,000. Botkin uses the straight-line method ot depreciation. Botkin Manufacturing sold the machine on July 1, 2011, for $19,800 When the machine was purchased in 2009, it was recorded as n aset The machine has been used to generate revenue. Therefore, a portion of the cost of the machine must be allocated to reven each period. This is accomplished through and follows which accounting principle s Depreciation expense for each full year is calculated ty dividing the asset's depreciable cost by the useful life. The machine was sold on July 1, but had been uned during the first half of 2011. Therefore, you must frst seet Prepare the entry in the journal below. DOC. POST DEBIT DATE Not sure about the account title? Click on the categories below to view its chart of + Equity Revenues/ Gains Expenses Losses How does each row of the above journal entry affect the accounting equation, and on which financial statement is it reported? If an element ofthe accounting equation is not aected, select "No change" Liabilities Equity Financial Statement Next, you will Select case, there has been Selectbecause the amount received for the machine wasSelectthe book value of the machine. Now you must Select You must understand the following in order to complete the journal entry for the disposal . The machine sold for $19,800. Therefore, this amounts recorded as a sent to the Select e The asset has been sold, so you debit Accumulated Depreciation-Machine for Any gain or loss is recorded at this time. A gain would be recorded with a Select anda loss would be recorded with a Select You first determine the book value of the asset to be$ In this Prior to the sale, the machine account has a Selectbalance. You must Selectthe Machine account for the Complete the journal entry. If an amount box does not require an entry, leave it blank. GENERAL JOURNALExplanation / Answer
=> See workings below at end
1)…..This is accomplished through charging depreciation and follows matching principle.
2)…..Therefore you must compute depreciation for half year for getting carrying amount of asset.
3) Journal Entry
Depreciation A/c Dr 3,600
Accumulated Depreciation 3,600
(Depreciation Charged)
Bank A/c Dr 19,800
Accumulated Depreciation A/c Dr 18,000
Loss on sale of machine Dr 2,200
To Machinery A/c 40,000
(Sale of Machine and loss recognized)
4) Impact:
Assets =
Liabilities
+ Equity
Financial Statement
Depreciation A/c Dr 3,600
Reduction in profit by charge of depreciation
Profit and Loss Account
Accumulated Depreciation 3,600
Increase in liability i.e. Depreciation provision
Balance Sheet
Bank A/c Dr 19,800
Increase in Assets i.e. Bank Balance
Balance Sheet
Accumulated Depreciation A/c Dr 18,000
Decrease in liability i.e. Depreciation provision
Balance Sheet
Loss on sale of machine Dr 2,200
Reduction in profit
Profit and Loss Account
To Machinery A/c 40,000
Decrease in Assets
5) Next you will compute the gain or loss on sale of machinery. You first determine the book value of machinery be (40000-18000) i.e. 22000. In this case there has been loss as the amount received is less than book value. Now you must compute the loss.
The machine sold for 19,800. Therefore this amount is recorded as a receipt to the bank account.
Asset has been sold so you debit Accumulated depreciation by 18,000.
Any gain is recorded with a credit and loss is recorded with a debit.
Prior to this, the machinery had balance of 40,000. You must credit the machine with 40,000.
Working:
Original Value of machinery = 40,000
Residual Value = 4,000
Life = 5 years
Depreciation charge per annum = (40000-4000)/5= 7,200
Depreciation for 1 Jan 2009 to Jun 30 2011 = 7,200 X 2.5 ( years)= 18,000
Book Value of asset at the time of sale = 40,000-18,000= 22,000
Sale price = 19,800
Loss on Sale = 22,000 (BV)- 19,800 (SP) = 2,200
Assets =
Liabilities
+ Equity
Financial Statement
Depreciation A/c Dr 3,600
Reduction in profit by charge of depreciation
Profit and Loss Account
Accumulated Depreciation 3,600
Increase in liability i.e. Depreciation provision
Balance Sheet
Bank A/c Dr 19,800
Increase in Assets i.e. Bank Balance
Balance Sheet
Accumulated Depreciation A/c Dr 18,000
Decrease in liability i.e. Depreciation provision
Balance Sheet
Loss on sale of machine Dr 2,200
Reduction in profit
Profit and Loss Account
To Machinery A/c 40,000
Decrease in Assets