Exercise 8-17 partial-year depreciation; disposal of plant asset lo p2 rayya co. purchases and installs a machine on january 1, 2018, at a total cost of $105,000. straight-line depreciation is taken each year for four years assuming a seven-year life and no salvage value. the machine is disposed of on july 1, 2022, during its fifth year of service. prepare entries to record the partial year’s depreciation on july 1, 2022 and to record the disposal under the following separate assumptions: (1) the machine is sold for $45,500 cash. (2) an insurance settlement of $25,000 is received due to the machine’s total destruction in a fire.

To record he partial year’s depreciation on July 1, 2022

Dr Depreciation expenses              $7,500

      Cr Accumulated Depreciation  $7,500

(to record he partial year’s depreciation on July 1, 2022)

(1) To record disposal as machine is sold for $45,500 cash

      Dr Cash                                         $45,500

      Dr Accumulated Depreciation     $52,500

         Cr Loss on asset disposal         $7,000

         Cr Machinery                              $105,000

(2) To record insurance settlement of $25,000 due to the machine’s total destruction in a fire:

      Dr Cash                                         $25,000

      Dr Accumulated Depreciation     $52,500

         Cr Loss on asset disposal         $27,500

         Cr Machinery                              $105,000            

Explanation:

The depreciation expense for each year is (105K-0)/7 = $15K => Half-year depreciation expenses = 15K/2 = $7.5K. Thus in Jul 1,2022, we need to book $7K of depreciation expenses for half-year expenses of 2020.

To Jul 1, 2022, the asset has been on book for 3.5 years, thus the accumulated depreciation relating to the asset is 3.5 x 15K = $52.5K which makes the net book value of the asset $52.5K.

So, the sold of asset at $45,500 will results to a loss of $7,000 (45.5K-52.5K) and the insurance settlement of $25,000 will results to a loss of $27,500 (25K - 52.5K)