Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies i

Question

Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies it for use the next day at an $3420 cost. On January 3, it is installed on a required operating platform costing $1,080, and it is further readied for operations. The company predicts the machine will be used for six years and have a $14,600 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.

1. Prepare journal entries to record the machines purchase and the cost to read and install it. Cash is paid for all costs incurred.

2. Prepare journal entries to record depreciation of the machine at December 31 of (a) its first year in operations and (b) the year of its disposal.

3. Prepare journal entries to record the machine's disposal under each of the following assumptions. (a) it is sold for $13,500 cash; (b) it is sold for $45,000 cash; and (c) it is destroyed in a fire and the insurance company pays $24,000 cash to settle the loss claim.

Explanation / Answer

1. Jan 2 Debit: Machine 167,000 Credit: Cash 167,000 Debit: Machine 3420 Credit: cash 3420 Jan 3 Debit: Machine 1080 Credit: Cash 1080 2. depreciation = (171,500 - 14600)/6 = 26150 per year a. Dec 31 1st year: Debit: Depreciation expense 26150 Credit: Accumulated Depreciation 26150 b. Dec 31 5th year: Debit: Depreciation expense 26150 Credit: Accumulated Depreciation 26150 3. a. Debit: Cash 13,500 Debit: Accumulatd Depreciation 130,750 Debit: Loss 27,250 Credit: Machine 171,500 b. Debit: Cash 45,000 Debit: Accumulated Depreciation 130,750 Credit: Machine 171,500 Credit: Gain 4250 c. Debit: Cash 24,000 Dedit: Accumulated Depreciation 130,750 Debit: Loss due to fire 16,750 Credit: Machine 171,500

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