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27 October, 06:50

Ben Company has a used executive charter plane that originally cost $1,000,000. Straight-line depreciation on the plane has been recorded for six years, with a $100,000 expected salvage value at the end of its estimated eight-year useful life. The last depreciation entry was made at the end of the sixth year. Eight months into the seventh year, Ben disposes of the plane. Required Prepare journal entries to record: a. Depreciation expense to the date of disposal. b. Sale of the plane for cash at its book value. c. Sale of the plane for $300,000 cash. d. Sale of the plane for $220,000 cash. e. Destruction of the plane in a fire. Ben expects a $210,000 insurance settlement.

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  1. 27 October, 07:17
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    Answer and Explanation:

    The Journal entry is shown below:-

    a. Depreciation expense - Airplane Dr, $75000

    To Accumulated depreciation - Airplane $75000

    (Being depreciation expense for 8 months is recorded)

    b. Cash Dr, $250,000

    To Accumulated depreciation - Airplane $750,000

    To Airplane $1,000,000

    (Being the sale of airplane is recorded)

    c. Cash Dr, $300,000

    Accumulated depreciation - Airplane Dr, $750,000

    To Airplane $1,000,000

    To Gain on sale of airplane $50,000

    (Being the sale of airplane is recorded)

    d. Cash Dr, $220,000

    Loss on sale of airplane Dr, $30,000

    Accumulated depreciation - Airplane Dr, $750,000

    To Airplane $1,000,000

    (Being the sale of airplane is recorded)

    e. Insurance settlement Dr, $210,000

    Loss of insurance settlement Dr, $40,000

    Accumulated depreciation - Airplane Dr, $750,000

    To Airplane $1,000,000

    (Being insurance claim on airplane destroyed by fire is recorded)

    Working Note

    Depreciation per year = (Cost of asset - Salvage value) : Useful life

    = ($1,000,000 - $100,000) : 8 years

    = $112,500

    Now,

    Accumulated depreciation for six years = $112,500 * 6 years

    = $675,000

    a. Depreciation expense for 8 months = $112,500 * 8 : 12

    = $75,000

    b. Accumulated depreciation up to the date of disposal

    = $675,000 + $75,000

    = $750,000

    Book value at the date of disposal

    = $1,000,000 - $750,000

    = $250,000

    c.

    Gain on sale of airplane = (Accumulated depreciation + Cash) - Cost of asset

    = ($750,000 + $300,000) - $1,000,000

    = $50,000

    d.

    Loss on sale of airplane = Cost of asset - (Accumulated depreciation + Cash)

    = $1,000,000 - $750,000 + $220,000

    = $30,000

    e. Loss of insurance settlement = Cost of asset - (Accumulated depreciation + Insurance settlement)

    = $1,000,000 - $750,000 + $210,000

    = $40,000

    Therefore with the above formula we have prepared the journal entries.
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