Question

On January 1, 2017, Stockton Manufacturing purchased a machine for $910,000. The company expected the machine to remain useful for eight years and to have a residual value of $80,000. Stockton Manufacturing uses the straight-line method to depreciate its machinery. Stockton Manufacturing used the machine for four years and sold it on January 1, 2021, for $350,000. 1. Compute accumulated depreciation on the machine at January 1, 2021 (same as December 31,2020). 2. Record the sale of the machine on January 1, 2021.

Answer 1

The machine has a total depreciable cost of $910,000 - $80,000 (residual value) = $830,000.

Since the machine is expected to remain useful for eight years, the annual depreciation expense is $830,000 / 8 = $103,750.

To calculate the accumulated depreciation after four years, we multiply the annual depreciation expense by the number of years of use: $103,750 x 4 = $415,000.

So, the accumulated depreciation on the machine at January 1, 2021 (same as December 31, 2020), is $415,000.

To record the sale of the machine on January 1, 2021, we need to update the machine's book value and record the cash received from the sale.

The book value of the machine on January 1, 2021, is the original cost minus accumulated depreciation: $910,000 - $415,000 = $495,000.

The sale of the machine for $350,000 results in a gain or loss. To calculate the gain or loss, we subtract the book value from the cash received: $350,000 - $495,000 = -$145,000.

Since the cash received is less than the book value, we record a loss on the sale of the machine. The journal entry to record the sale would be:

Debit: Cash $350,000
Debit: Accumulated Depreciation $415,000
Debit: Loss on Sale of Machine $145,000
Credit: Machine $910,000