Selected accounts included in the property, plant, and equipment section of Faul

Question

Selected accounts included in the property, plant, and equipment section of Faulty Corporation's balance sheet at December 31, 2017, had the following balances: Land $ 400,000 Land improvements 130,000 Buildings 2,000,000 Machinery and equipment 800,000 .During 2018, the following transactions occurred: >> A machine costing $18,000 on July 1, 2016, was scrapped on June 30, 2018. Sum –of- the year’s digits had been recorded on the basis of a 5-year life with no salvage value. >> A machine was sold for $38,000 on July 1, 2018. Original cost of the machine was $72,000 on Feb 28, 2015, and it was depreciated on the double-declining balance basis over an estimated useful life of eight years and a salvage value of $2,000.

a. Calculate the gain or loss on the disposal of each asset. Place your answer in the appropriate column.

Item

Amount of gain

Amount of loss

Scrapped machine on 6/30/18

Sale of machine on 7/1/18

b. Prepare the journal entries for the disposal & sale of the machine during 2018. Year 2018 depreciation has yet been recorded.

Date

Account

Debit

Credit

Item

Amount of gain

Amount of loss

Scrapped machine on 6/30/18

Sale of machine on 7/1/18

Explanation / Answer

Journal entry

Depreciation using sum of digits

18,000*5/15 = $6000( from july 1 to 30 june 2017)

18,000 *4/15 = $4800 ( from july 1 to 30 june 2018

Double declining rate will be 1/8*2   = 25%

2015 dep for 10 months 72,000 @ 25% *10/12   = $15,000

2016                               57,000@25%                = 14,250

2017                              42,750@25%                 = 10,687.50

2018 for 6 month          32062.50@25%*6/12    =    4,007

amount of gain amount of loss Scrapped machine on 6/30/18 $7,200 Sale of machine on 7/1/18 $9944.50

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