Question 9.Q4: A business purchased two rivet-making machines on 1 January ...
A business purchased two rivet-making machines on 1 January 20X5 at a cost of $15,000 each. Each had an estimated life of five years and a nil residual value. The straight line method of depreciation is used.
Owing to an unforeseen slump in market demand for rivets, the business decided to reduce its output of rivets, and switch to making other products instead. On 31 March 20X7, one rivet-making machine wassold (on credit) to a buyer for $8,000.
Later in the year, however, it was decided to abandon production of rivets altogether, and the second machine was sold on 1 December 20X7 for $2,500 cash.
Prepare the machinery account, depreciation of machinery account and disposal of machinery account for the accounting year to 31 December 20X7.
| MACHINERY ACCOUNT | |||||
| $ | $ | ||||
| 20X7 | 20X7 | ||||
| 1 Jan | Balance b/d | 30,000 | 31 Mar | Disposal of machinery account | 15,000 |
| 1 Dec | Disposal of machinery account | \underline{15,000 } | |||
| \overline{\underline{\underline{30,000}}} | \overline{\underline{\underline{30,000}}} | ||||
| MACHINERY – ACCUMULATED DEPRECIATION | |||||
| $ | $ | ||||
| 20X7 | 20X7 | ||||
| 31 Mar | Disposal of machinery account* | 6,750 | 1 Jan | Balance b/d | 12,000 |
| 1 Dec | Disposal of machinery account** | \underline{ 8,750 } | 31 Dec | I & E account*** | \underline{ 3,500 } |
| \underline{\underline{15,500}} | \underline{\underline{15,500}} | ||||
| * | Depreciation at date of disposal = $6,000 + $750 | ||||
| ** | Depreciation at date of disposal = $6,000 + $2,750 | ||||
| *** | Depreciation charge for the year = $750 + $2,750 | ||||
| DISPOSAL OF MACHINERY | |||||
| 20X7 | $ | 20X7 | $ | ||
| 31 Mar | Machinery account | 15,000 | 31 Mar | Account receivable (sale price) | 8,000 |
| 31 Mar | Accumulated depreciation | 6,750 | |||
| 1 Dec | Machinery | 15,000 | 1 Dec | Cash (sale price) | 2,500 |
| 1 Dec | Accumulated depreciation | 8,750 | |||
| \underline{ } | 31 Dec | I & E a/c (loss on disposal) | \underline{4,000 } | ||
| \overline{\underline{\underline{30,000}}} | \overline{\underline{\underline{30,000}}} | ||||
You should be able to calculate that there was a loss on the first disposal of $250, and on the second disposal of $3,750, giving a total loss of $4,000.
Workings
| 1 | At 1 January 20X7, accumulated depreciation on the machines will be:
2 machines × 2 years ×\frac{\$15,000}{5} per machine pa = $12,000, or $6,000 per machine |
|
| 2 | Monthly depreciation is \frac{\$3,000}{12} = $250 per machine per month | |
| 3 | The machines are disposed of in 20X7. | |
| (a) | On 31 March – after 3 months of the year.
Depreciation for the year on the machine = 3 months × $250 = $750 |
|
| (b) | On 1 December – after 11 months of the year.
Depreciation for the year on the machine = 11 months × $250 = $2,750 |
|