Question

The Fascinating Company is replacing a machine used for glazing. The old machine was originally recorded at a cost of $110,000 and depreciated over 10 years straight line with no salvage value. The statement of financial position shows a book value net of accumulated depreciation at the beginning of the financial year of $44,000. The cost of the new machine is $150,000 and Jon negotiated to trade in the old machine for $40,000 and pays cash for the balance.

Assume the glazing machine is sold on January 1 (half way into the financial year). Journalise all entries relating to the disposal of the old glazing machine.

Answer 1

Depreciation for half year = ($110,000 / 10) / 2 = $5,500

Accumulated depreciation = $44,000 + $5,500 = $49,500

Loss on sale of machine = $110,000 - $49,500 - $40,000 = $20,500

Cash paid for new machine = $150,000 - $40,000 = $110,000

The journal entry to record sale of old machine and purchase of new machine is:

Date	Account Titles and Explanation	Debit	Credit
Jan-01	Machine (New)	$150,000	-
	Accumulated depreciation	$49,500	-
	Loss on sale of machine	$20,500	-
	Machine (Old)	-	$110,000
	Cash	-	$110,000
	(To record new machine purchased)