Header: date/accounts/debit/credit Question 4 (20 points) On July 1, 2016, Alpha

Question

Header: date/accounts/debit/credit
Question 4 (20 points) On July 1, 2016, Alpha Company purchased for $76,000, equipment having a service life of eight years and an estimated residual value of $4,000. Alpha has recorded-depreciation of the equipment using the double-declining balance method. On December 31, 2018, before making any annual adjusting entries, the equipment was exchanged for new machinery having a fair value of $35,000. The transaction has commercial substance. Use this information to prepare all General Journal entries (without explanation) required to record the events for December 31, 2018. General Journal: Date Accounts Debit Credit

Explanation / Answer

Journal

Working note:

Cost of machine aquired on July 1, 2016 = $76,000

Scrap value of machine = $4,000

Useful life of machine = 8 years

Annual straight line depreciation = (Cost of machine - scrap value)/Useful life of machine

= (76,000 - 4,000)/8

= $9,000

Straight line depreciation rate = 9,000/72,000

= 12.5% per annum

Hence, double declining depreciation rate = 12.5% x 2

= 25%

Depreciation in 2016 = 76,000 x 25% x 6/12

= $9,500

Value of machinery as at Jan. 1, 2017 = 76,000 - 9,500

= $66,500

Depreciation in 2017 = 66,500 x 25%

= $16,625

Value of machinery as at Jan. 1, 2018 = 66,500 - 16,625

= $49,875

Depreciation in 2018 = 49,875 x 25%

= $12,469

Hence, value of machinery as at Dec. 31, 2018 = 49,875 - 12,469

= $37,406

Total depreciation provided from July 1, 2016 to Dec. 31, 2018 = 76,000 - 37,406

= $38,594

Cost of new machine = $35,000

Hence, loss on equipment exchanged = $37,406 - 35,000

= $2,406

Date Accounts Debit Credit Dec. 31, 2018 Depreciation 12,469 Accumulated depreciation 12,469 Accumulated depreciation 38,594 Equipment 38,594 Machine 35,000 Loss on exchange of equipment    2,406 Equipment 37,406

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