XXX is in the machine job shop business. Its owns a lathe that was purchased 4 y
ID: 2487114 • Letter: X
Question
XXX is in the machine job shop business. Its owns a lathe that was purchased 4 years ago for $75,000 and was being depreciated over 5 years using straight line deprecation with out taking salvage value into consideration. Domco wants to sell the lathe to make room for a new one and has asked a machine tool dealer to make an offer to purchase the lathe.
Required:
a. Assume the machine tool dealer offered the company $18,000 in cash for lathe and the company accepted the offer. Make the required journal entry record the sale of the lathe.
b. Assume the machine tool dealer offered the company $13,000 in cash for lathe and the company accepted the offer. Make the required journal entry record the sale of the lathe.
Explanation / Answer
The assumptions taken as per details given in the problem
The cost of machine is $ 75,000
The life of machine is 5 years
The depreciation charged is straight line method without taking salvage value into consideration
The per year depreciation = $75,000 / 5 = $15,000
The accumulated depreciation till 4 years is $60,000 ( $15,000 x 4)
The net block of lathe machine at the end of 4 year is = cost of machine- accumulated depreciation’
Net block of machine = $ 75,000 - $60,000 = $15,000
If the machine is sold for $ 18,000 the profit is calculated as below
Profit / Loss = sale value – net block
Profit = $18,000 - $15,000
Profit = $3000
Prepare the Journal Entry for sale at $18,000
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
Cash
18,000
Accumulated depreciation- lathe
60,000
Cost - lathe
75,000
Gain on asset disposal
3,000
( To asset sold at $18,000 debited to cash and profit on sale of $3,000 is credited to gain on disposal a/c and asset are reversed in books by crediting cost of asset and debiting the accumulated depreciation a/c )
If the machine is sold for $ 13,000 the profit is calculated as below
Profit / Loss = sale value – net block
Profit = $13,000 - $15,000
Loss = $2000
Prepare the Journal Entry for sale at $13,000
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
Cash
13,000
Accumulated depreciation- lathe
60,000
Loss on asset disposal
2,000
Cost - lathe
75,000
( To asset sold at $13,000 debited to cash and loss on sale of $2,000 is debited to loss on disposal a/c and asset are reversed in books by crediting cost of asset and debiting the accumulated depreciation a/c )
General Voucher
Date
Account title and Explanation
Post.
Ref.
Debit ($)
Credit ($)
Cash
18,000
Accumulated depreciation- lathe
60,000
Cost - lathe
75,000
Gain on asset disposal
3,000
( To asset sold at $18,000 debited to cash and profit on sale of $3,000 is credited to gain on disposal a/c and asset are reversed in books by crediting cost of asset and debiting the accumulated depreciation a/c )
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