Question

On July 1, Year 1, Yellow Rose Corp. paid $25,000 cash for a machine and paid an additional 8% sales tax. On the same date, an electrician was paid $1,000 to install custom switches to enhance the functionality of the machine. Yellow Rose estimates a five-year useful life, uses straight-line depreciation, and expects a $2,000 salvage value. The machine was placed in service on October 1, Year 1. Yellow Rose has a calendar year-end.On December 31, Year 2, the machine was sold for $14,000 cash. Depreciation expense for Year 2 was properly recorded.Use the data above to prepare each of the journal entries for Yellow Rose specified below.1. Prepare the journal entry to record the cost of the machine.2. Prepare the journal entry to record the Year 1 depreciation for the machine.3. Prepare the journal entry to record the sale of the machine.

Answer 1

Answer:

Journal entries are given below

Explanation:

July 1, Year 1 (Yellow Rose Corp. purchased a machine)

                                            DEBIT      CREDIT

Machine                            $28,000  

Cash                                                     $28,000

Working

Cost of machine = Purchase price + Sales tax + Installation

Cost of machine =  $25,000 + $2,000 + $1,000

Cost of machine =   $28,000

Depreciation for year 1 (October to December)

                                                       DEBIT      CREDIT

Depreciation Expenses                $1,300  

Accumulated Depreciation                             $1,300

Working

Annual Depreciation expense = (Cost - salvage value) / useful life

Annual Depreciation expense = (28000 - 2000) / 5 = $5,200

Depreciation for 3 months

Depreciation = $5,200 x 3/12

Depreciation = $1300

Sale of the machine

                                                       DEBIT      CREDIT

Cash                                        $14,000  

Loss on Sale                                 $7,500  

Accumulated Depreciation         $6,500  

Machinery                                                       $28,000

Workng

Gain/Loss on sale = Sale proceed - carrying value

Gain/Loss on sale = 14,000 - 21,500

Loss on sale = $7,500

Carrying value = Cost - Accumulated depreciation

Carrying value = 28,000 - 6500 = 21500

Accumulated depreciation = $1,300 + $5,200 = $6,500