Question: I was unable to find the complete question on the google search, however I find a question that was similar to the question you pasted. So I will prefer to solve the following question:
On December 31, 2017, Travis Tritt Inc. has a machine with a book value of $940,000. The original cost and related accumulated depreciation at this date are as follows.
Machine $1,300,000
Less: Accumulated depreciation <u> 360,000 </u>
Book value $940,000
Depreciation is computed at $60,000 per year on a straight-line basis.
Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.
A) A fire completely destroys the machine on August 31, 2018. An insurance settlement of $430,000 was received for this casualty. Assume the settlement was received immediately.
b) On April 1, 2018, Tritt sold the machine for $1,040,000 to Dwight Yoakam Company.
(c) On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair market value of the machine at the time of the donation was estimated to be $1,100,000.
Answer:
Case A
In this case the machine was destroyed by fire. Fortunately, it was insured and as a result we received an amount of $430,000. This is the recoverable amount. Now we will treat this accident as a disposal and calculate the loss on the disposal of the asset.
Step 1 Remove all the accumulated depreciation associated with the Machine
Dr Accumulated Depreciation $360,000
Step 2 Remove the value of the Asset by cost from the Machine account
Cr Machine (cost) $1300,000
Step 3 Calculate the Depreciation for the 8 months
$60,000 is calculated for one year and is given in the question.
For 8 months:
Depreciation for 8 months = $60,000 * 8/12 = $40,000
Dr Depreciation Expense $40,000
Step 4 Record the insurance received as cash received due to asset destruction.
Dr Cash Received $430,000
Step 5 Calculate the loss or profit on the destruction
(Profit) / Loss = $1300,000 Cost - $360,000 Accumulated Depreciation - Cash Received $430,000 - $40,000 Depreciation for 8 months = $470,000
We have a loss of $470,000 and we should record it by:
Dr Loss on Disposal $470,000
Summary
Dr Loss on Disposal $470,000
Dr Depreciation Expense $40,000
Dr Cash Received $430,000
Dr Accumulated Depreciation $360,000
Cr Machine (cost) $1300,000
Case 2
In this case the asset is been sold for $1040,000 in the start of April,2018 which means it is sold after 3 months.
The first two steps are same.
Step 1 Remove all the accumulated depreciation associated with the Machine
Dr Accumulated Depreciation $360,000
Step 2 Remove the value of the Asset by cost from the Machine account
Cr Machine (cost) $1300,000
Step 3 Calculate the Depreciation for the 3 months
For 3 months:
Depreciation for 3 months = $60,000 * 3/12 = $15,000
Dr Depreciation Expense $15,000
Step 4 Record the cash received due to asset disposal.
Dr Cash Received $1,040,000
Step 5 Calculate the loss or profit on the destruction
(Profit) / Loss = $1300,000 Cost - $360,000 Accumulated Depreciation - Cash Received $1,040,000 - $15,000 Depreciation for 3 months = ($115,000)
We have a Profit of $115,000 and we should record it by:
Cr Profit on Disposal $115,000
Case C
In this case, the asset is donated at the start of July, 2018. This asset will be treated the same way but their is exception that it will be revalued to the fair value of the asset and thereafter will treated as disposal for making donations. This fair value will be treated as Donation Expense and will be debited.
Revaluation of the asset:
The asset will be revalued to $1,100,000 from its carrying value. Its carrying value is $940,000 and the excessive amount will be 160,000 which will be adjusted against accumulated depreciation.
Dr Accumulated depreciation $160,000
Cr Revaluation reserve $160,000
Now we will treat the asset as disposal and will remove the revaluation reserve according to IAS 16 Property, Plant and Equipment. The adjustment will go to Retained earnings:
Dr Revaluation reserve $160,000
Cr Retained Earnings $160,000
Now we will treat the asset as disposal made against Donation:
Step 1 Remove all the accumulated depreciation associated with the Machine by $200,000 (360,000-160,000).
Dr Accumulated Depreciation $200,000
Step 2 Remove the value of the Asset by cost from the Machine account
Cr Machine (cost) $1300,000
Step 3 Calculate the Depreciation for the 6 months
For 6 months:
Depreciation for 6 months = $60,000 * 6/12 = $30,000
Dr Depreciation Expense $30,000
Step 4 There is no cash receipt because of the asset donation.
Step 5 Calculate the loss or profit on the destruction
(Profit) / Loss = $1300,000 Cost - $200,000 Accumulated Depreciation - Cash Received $0 - $30,000 Depreciation for 6 months = $1,070,000
We have made a donation of $1,070,000 and we should record it as expense:
Dr Donation Expense $1,070,000
