Using the Rayon Corporation data, what journal entries are required on January 2 to record the disposal of Machine A (sold for $35,200 cash) and Machine B (scrapped for $0)?

During the current year, Rayon Corporation disposed of two different assets. On January 1, prior to their disposal, the accounts reflected the following:\n\n| Asset | Original Cost | Residual Value...

During the current year, Rayon Corporation disposed of two different assets. On January 1, prior to their disposal, the accounts reflected the following:\n\n| Asset | Original Cost | Residual Value | Estimated Life | Accumulated Depreciation (straight-line) |\n|----------|---------------|----------------|----------------|-----------------------------------------|\n| Machine A| $58,000 | $11,600 | 8 years | $29,000 (5 years) |\n| Machine B| $15,900 | $3,000 | 6 years | $8,600 (4 years) |\n\nThe machines were disposed of in the following ways:\n a. Machine A: Sold on January 2, for $35,200 cash.\n b. Machine B: Scrapped on January 2 with zero proceeds (and zero cost of removal).\n

Using the Rayon Corporation data, what journal entries are required on January 2 to record the dispo...

Answer

Machine A has a book value of $58,000 − $29,000 = $29,000, so selling it for $35,200 creates a gain of $6,200. Record: Dr Cash $35,200; Dr Accumulated Depreciation, Machine A $29,000; Cr Machine A $58,000; Cr Gain on Disposal of Machine A $6,200. Machine B has a book value of $15,900 − $8,600 = $7,300, so scrapping it for $0 creates a loss of $7,300. Record: Dr Accumulated Depreciation, Machine B $8,600; Dr Loss on Disposal of Machine B $7,300; Cr Machine B $15,900.

Explanation

What you are recording on the disposal date

When an asset is disposed of, you (1) remove the asset’s cost from the books, (2) remove its accumulated depreciation, and (3) recognize any cash received plus any gain or loss.

Step 1: Compute each machine’s book value

Book value (carrying amount) is:

$$\text{Book Value} = \text{Cost} - \text{Accumulated Depreciation}$$

Machine A:

$$58{,}000 - 29{,}000 = 29{,}000$$

Machine B:

$$15{,}900 - 8{,}600 = 7{,}300$$

Step 2: Decide whether there is a gain or loss

Compare proceeds to book value:

$$\text{Gain/Loss} = \text{Proceeds} - \text{Book Value}$$

Machine A proceeds = $35,200:

$$35{,}200 - 29{,}000 = 6{,}200 \; (\text{gain})$$

Machine B proceeds = $0:

$$0 - 7{,}300 = -7{,}300 \; (\text{loss})$$

Journal entry for Machine A (sold for cash)

Remove the asset and its accumulated depreciation, record the cash received, and plug the difference to a gain:

Dr Cash $35,200
Dr Accumulated Depreciation, Machine A $29,000
Cr Machine A $58,000
Cr Gain on Disposal of Machine A $6,200

Journal entry for Machine B (scrapped, no proceeds)

No cash is received, so the remaining book value becomes a loss:

Dr Accumulated Depreciation, Machine B $8,600
Dr Loss on Disposal of Machine B $7,300
Cr Machine B $15,900

Quick check (debits equal credits)

Machine A: Debits $35,200 + $29,000 = $64,200; Credits $58,000 + $6,200 = $64,200.
Machine B: Debits $8,600 + $7,300 = $15,900; Credits $15,900.

Skills You Achive

financial accounting journal entries asset disposal accounting depreciation gain and loss calculation