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15 July, 18:06

Rayya Co. purchases a machine for $105,000 on January 1, 2019. Straight-line depreciation is taken each year for four years assuming a seven-year life and no salvage value. The machine is sold on July 1, 2023, during its fifth year of service. Prepare entries to record the partial year's depreciation on July 1, 2023, and to record the sale under each separate situation. (1) The machine is sold for $45,500 cash. (2) The machine is sold for $25,000 cash.

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  1. 15 July, 18:17
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    Entry to record the partial year's depreciation on July 1, 2023:

    Debit Depreciation Expense $7,500

    Credit Accumulated depreciation account $7,500

    1) The machine is sold for $45,500 cash:

    Debit Cash $45,500

    Debit Accumulated depreciation account $67,500

    Credit Gain on asset selling $8,000

    Credit Machine asset $105,000

    (2) The machine is sold for $25,000 cash

    Debit Cash $25,000

    Debit Accumulated depreciation account $67,500

    Debit Loss on asset selling $12,500

    Credit Machine asset $105,000

    Explanation:

    Rayya Co. uses straight-line depreciation method, Depreciation Expense each year is calculated by following formula:

    Annual Depreciation Expense = (Cost of machine - Salvage Value) / Useful Life = ($105,000 - $0) / 7 = $15,000

    In 2023, the machine is used for 6 months (half year)

    Depreciation Expense = $15,000/2 = $7,500

    Entry to record the partial year's depreciation on July 1, 2023:

    Debit Depreciation Expense $7,500

    Credit Accumulated depreciation account $7,500

    On July 1, 2023, Accumulated depreciation = $15,000 x 4 + $7,500 = $67,500

    Carrying amount of the machine = $105,000 - $67,500 = $37,500

    (1) The machine is sold for $45,500 cash:

    Sale price - Carrying amount of the machine = $45,500 - $37,500 = $8,000>0

    => The company recognizes gain on the sales $8,000

    Debit Cash $45,500

    Debit Accumulated depreciation account $67,500

    Credit Gain on asset selling $8,000

    Credit Machine asset $105,000

    (2) The machine is sold for $25,000 cash

    Sale price - Carrying amount of the machine = $25,000 - $37,500 = - $12,500<0

    => The company recognizes loss on the sales $12,500

    The entry should be made:

    Debit Cash $25,000

    Debit Accumulated depreciation account $67,500

    Debit Loss on asset selling $12,500

    Credit Machine asset $105,000
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Home » Business » Rayya Co. purchases a machine for $105,000 on January 1, 2019. Straight-line depreciation is taken each year for four years assuming a seven-year life and no salvage value. The machine is sold on July 1, 2023, during its fifth year of service.
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