On December 31, 2010, Chrysler Inc. has a machine with a book value of $940,000.

Question

On December 31, 2010, Chrysler Inc. has a machine with a book value of $940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine $1,300,000
Accumulated depreciation 360,000
Book value $940,000


Depreciation is computed at $72,000 per year on a straight-line basis.

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

a.) A fire completely destroys the machine on August 31, 2011. An insurance settlement of $630,000 was received for this casualty. Assume the settlement was received immediately.
b.) On April 1, 2011, Chrysler sold the machine for $1,040,000 to Avanti Company.
c.) On July 31, 2011, the company donated this machine to the Mountain King City Council. The fair market value of the machine at the time of the donation was estimated to be $1,100,000.

Debit Credit
a.) Depreciation Expense
Accumulated Depreciation-machine

Loss on Disposal of Machine
Cash
Accumulated Depreciation -machine
Machine

b.) Depreciation Expense
Accumulated Depreciation -machine
Cash
Accumulated Depreciation- machine
Gain on disposal of machine

c.) Depreciation Expense
Accumulated Depreciation - machine

Contribution Expense
Accumulated Depreciation - machine
Machine
Gain disposal of machine

Explanation / Answer

Debit Credit a.) Depreciation Expense 48,000 Accumulated Depreciation-machine 48,000 Loss on Disposal of Machine 262,000 Cash 630,000 Accumulated Depreciation –machine 408,000 Machine 1,300,000 b.) Depreciation Expense 18,000 Accumulated Depreciation –machine 18,000 Cash 1,040,000 Accumulated Depreciation- machine 378,000 Gain on disposal of machine 118,000 Machine 1,300,000 c.) Depreciation Expense 42,000 Accumulated Depreciation – machine 42,000 Contribution Expense 1,100,000 Accumulated Depreciation – machine 402,000 Machine 1,300,000 Gain disposal of machine 202,000

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