Question

Rayya Co. purchases and installs a machine on January 1, 2017, at a total cost of $105,000. Straight-line depreciation is taken each year for four years assuming a seven-year life and no salvage value. The machine is disposed of on July 1, 2021, during its fifth year of service.

Prepare entries to record the partial year’s depreciation on July 1, 2021, and to record the disposal under the following separate assumptions:
(1) The machine is sold for $45,500 cash.
(2) An insurance settlement of $25,000 is received due to the machine’s total destruction in a fire.

Answer 1

July 01,2021

Dr Depreciation expense $7,500

Cr Accumulated depreciation—machinery7,500

(1)

July 01,2021

Dr Cash $45,500

Dr Accumulated depreciation—Machinery $67,500

Cr Gain on sale of machinery $8,000

Cr Machinery $105,000

(2)

Dr Cash $25,000

Dr loss from fire $12,500

Dr Accumulated depreciation $67,500

Cr Machinery $105,000

Explanation:

Journal entries

July 01,2021

Dr Depreciation expense $7,500

Cr Accumulated depreciation—machinery7,500

(1) The machine is sold for $45,500 cGeneral Journal

July 01,2021

Dr Cash $45,500

Dr Accumulated depreciation—Machinery $67,500

Cr Gain on sale of machinery $8,000

Cr Machinery $105,000

(2) Rayya receives an insurance settlement of $25,000 resulting from the total destruction of the machinein a fire.

Dr Cash $25,000

Dr loss from fire $12,500

Dr Accumulated depreciation $67,500

Cr Machinery $105,000

Annual depreciation = $105,000 / 7 years = $15,000

Depreciation for 6 months = $15,000× 6/12 = $7,500

(1) & (2)Total accumulated depreciation at date of disposal:

Four years (4 × $15,000)$60,000

Partial year (6/12 × $15,000) $7,500

Total accumulated depreciation$67,500