Fast Movers Ltd purchased a machine on the first day of their financial year: 1 January 2002. The machine cost $75 000 and has an expected useful life of 10 years at which time its salvage value will be $8000. An even pattern of benefits is expected to be derived from the machine. Then on 31 December 2005 (3 years later) the machine is sold for $65 000. What are the appropriate journal entries to record the disposal of the machine in line with the requirements of AASB 116?
E) None of the given answers.

Question

Quizplus · Accepted Answer

According to AASB 116, the depreciation expense must be calculated using the Straight Line Method (SLM) as follows: 
Depreciation expense per year = (Cost - Salvage value) / Useful life
= ($75,000 - $8,000) / 10
= $6,700 per year

As the machine was sold on 31st December 2005, it was used for 4 years (2002 to 2005). Therefore, the accumulated depreciation as at 31st December 2005 is:
Accumulated depreciation = Depreciation expense per year x No. of years
= $6,700 x 4
= $26,800

The carrying amount of the machine as at 31st December 2005 is:
Carrying amount = Cost of machine - Accumulated depreciation
= $75,000 - $26,800
= $48,200

When the machine is sold, we need to recognize the gain or loss on disposal. This can be calculated as follows:
Gain or loss on disposal = Selling price - Carrying amount
= $65,000 - $48,200
= $16,800 (gain)

Therefore, the appropriate journal entries to record the disposal of the machine as at 31st December 2005 are:
Debit Cash: $65,000
Debit Accumulated depreciation: $26,800
Credit Machine (cost): $75,000
Credit Gain on disposal: $16,800

Fast Movers Ltd Purchased a Machine on the First Day