Rayya Co. purchases and installs a machine on January 1, 2017, at a total cost of $201,600. 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, 2021, during its fifth year of service.

Prepare entries to record the partial year's depreciation on July 1, 2021, and to record the disposal under the following separate assumptions:

(1) The machine is sold for $63,000 cosh.

(2) An Insurance settlement of $52.920 is received due to the machine's total destruction in a fire.

Debit Depreciation expense $14,400

Credit Accumulated depreciation $14,400

(1) Debit Other income/disposal account (p/l) $201,600

Credit Fixed Asset account $201,600

Debit Accumulated depreciation account $129,600

Credit Other income/disposal account (p/l) $129,600

Debit Cash account $63,000

Credit Other income/disposal account (p/l) $63,000

(2) Debit Other income/disposal account (p/l) $201,600

Credit Fixed Asset account $201,600

Debit Accumulated depreciation account $129,600

Credit Other income/disposal account (p/l) $129,600

Debit Cash account $52,920

Credit Other income (p/l) $52,920

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value) / Estimated useful life

Annual Depreciation = $201,600/7

= $28,800

Between January and July 1 is 6 months hence depreciation

= 6/12 * $28800

= $14,400

Accumulated depreciation at time of sale/destruction

= 4*$28800 + $14400

= $129,600

When the amount received from the disposal of an asset is higher than the carrying value of the asset, the company makes a gain on disposal. The proceed from the disposal of an asset may be recorded in the disposal or other income account.

On disposal, the carrying amount of the asset is derecognized by

Debit Other income/disposal account (p/l)

Credit Asset account

with the cost of the asset, then,

Debit Accumulated depreciation account

Credit Other income/disposal account (p/l)

With the accumulated depreciation of the asset at the date of disposal,

Furthermore,

Debit Cash account

Credit Other income/disposal account (p/l)

with the amount received from the disposal or sale of the asset

Entries to record the partial year's depreciation on July 1, 2021:

Debit Depreciation expense ($28,800x0.5) $14,400

Credit Accumulated depreciation $14,400

(To record accumulated depreciation - Jan. 1 - July 1, 2021)

(1) The following journals apply, if the machine is sold for $63,000 cash:

Debit Accumulated depreciation $129,600

Debit Loss on asset disposal $9,000

Debit Cash $63,000

Credit Machine cost (fixed asset) $201,600

(To record asset disposal)

(1) The following journals apply, if there was an insurance settlement of $52,920:

Debit Accumulated depreciation $129,600

Debit Loss on asset disposal ($52,920 - $72,000) $19,080

Debit Cash $52,920

Credit Machine cost (fixed asset) $201,600

(To record asset disposal)

Explanation:

Under straight-line method, depreciation is an allocation of the cost of an asset over its estimated useful life and it is expressed with this formula: (cost - residual value) / No of years = ($201,600 - 0) / 7 years = $28,800 yearly depreciation expense.

Accumulated depreciation on July 1, 2021 (4.5 Years) is $28,800 x 4.5 years $129,600.

So, the net book value (NBV) of the asset (expressed as Cost - Accumulated depreciation) is $201,600 - $129,600 = $72,000

Gain or loss on disposal = Sales proceed - NBV = $63,000 - $72,000 = $9,000 (loss)