Diaz Company owns a milling machine that cost $125,300 and has accumulated depreciation of $90,600. Prepare the entry to record the disposal of the milling machine on January 3 under each of the following independent situations. The machine needed extensive repairs, and it was not worth repairing. Diaz disposed of the machine, receiving nothing in return. Diaz sold the machine for $16,100 cash. Diaz sold the machine for $34,700 cash. Diaz sold the machine for $40,300 cash.

Situation 1: Diaz sold the machine for $16,100 cash

January 3

Dr. Cash $16,100

Dr. Loss on Disposal $18,600

Dr. Accumulated Depreciation $90,600

Cr. Machine $125,300

Situation 2: Diaz sold the machine for $34,700 cash.

January 3

Dr. Cash $34,700

Dr. Accumulated Depreciation $90,600

Cr. Machine $125,300

Situation 3: Diaz sold the machine for $40,300 cash

January 3

Dr. Cash $40,300

Dr. Accumulated Depreciation $90,600

Cr. Gain on Disposal $5,600

Cr. Machine $125,300

Explanation:

Accumulated depreciation is the sum of all the depreciation charged against the asset. This contra asset value. The asset is reported on the balance sheet after adjusting this value.

Situation 1:

Machine is sold at loss, which is calculated as below

Net Book value of Machine = $125,300 - $90,600 = $34,700

$16,100 cash is received against the NBV of machine

Loss on machine = $34,700 - $16,100 = $18,600

Situation 2:

Machine is sold at No gain no loss, which is calculated as below

Net Book value of Machine = $125,300 - $90,600 = $34,700

$34,700 cash is received against the NBV of machine, so there is no gain no loss on the disposal

Situation 3:

Machine is sold at gain, which is calculated as below

Net Book value of Machine = $125,300 - $90,600 = $34,700

$40,300 cash is received against the NBV of machine

Loss on machine = $40,300 - $34,700 = $5,600