Question

On November 1, 2017, Willis Company purchases a specialized machinery to be used for production of furniture in its plant. The list price of the machinery is $171,700 that Willis Company pays in cash.

In addition to the purchase price, Willis Company pays sales taxes of $1,000 at the date of purchase. After the machinery is purchased, Willis Company pays freight charges of $800 for delivery of the machinery. After the machinery arrives at the plant, Willis Company pays $500 for installation costs related to machinery.

The machinery is recorded as part of plant assets and its useful life is estimated to be 12 years with a residual value of $6,000.

The following two independent cases are related to the machinery of which the details are given above:

Case 1: Because of technological developments, managers of Willis Company consider to dispose of the machinery mentioned above after it has been used for some years. Thus, the machinery is sold for $87,000 cash on December 31, 2021.

Required: Assuming that straight-line method is used to depreciate the machinery;

Compute the gain or loss on the disposal?

Prepare the journal entry to record the above disposal.

Case 2: On March 31, 2020, Willis Company trades in the machinery as part of purchase of a new one. New machinery’s list price is $190,000. Willis accepts a trade-in allowance of $77,000 for the old machinery, paying the remaining amount in cash.

Required: Assuming that double-declining balance method is used to depreciate the machinery;

Compute the gain or loss on trade-in?

Prepare the journal entry to record the above trade-in.

Answer 1

Case 1
	List price of machinery	171700
	Sales taxes	1000
	Freight charges	800
	Installation charges	500
	Total cost of machinery	174000
	Residual value	6000
	Amount to be depreciated	168000	(174000-6000)
	Life of asset	12	Years
	Amount of depreciation per year	14000
Year	Depreciation expense
2017	14000*2/12	2333
2018	14000*12/12	14000
2019	14000*12/12	14000
2020	14000*12/12	14000
2021	14000*12/12	14000
	Total accumulated depreciation	58333
	Total cost of asset	174000
	Total accumulated depreciation	58333
	Book value of asset	115667
	Machinery sold	87000
	Loss on sale of machinery	28667	(115667-87000)
	Journal entry
	Cash	87000
	Accumulated depreciation	58333
	Loss on sale of machinery	28667
	Machinery		174000
Case 2	Double declining method
	Depreciation rate = 1*200% / 12	16.67%
	Depreciation expense	Depreciation expense	Acc. Depre	Book value
				174000
2017	Depreciation = 174000*16.67%*2/12	4833	4833	169167
2018	Depreciation = 169167*16.67%	28194	33028	140972
2019	Depreciation = 136139*16.67%	23495	56523	117477
2020	Depreciation = 80421*16.67*3/12	4895	61418	112582
	Total accumulate depreciation 31 march 2020	61418
	Total cost of asset	174000
	Total accumulate depreciation 31 march 2020	61418
	Book value of asset	112582
	Machinery sold	77000
	Loss on sale of machinery	35582	(112582-77000)
	Journal entry
	New machinery	190000
	Accumulated depreciation	61418
	Loss on sale of machinery	35582
	Old machinery		174000
	Cash		113000