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On 1 July 2019, Narre Ltd acquire a machine with a cost of $600,000, a residual...

On 1 July 2019, Narre Ltd acquire a machine with a cost of $600,000, a residual value of $100,000 and an estimated useful life of 4 years. On 1 July 2020, Narre Ltd exchanged this machine for a new similar machine. Sum-of-years-digits method was used. Ignore GST. Financial year ends on 30 June.

Required:

Prepare general journal entries to record the exchange of the machines on 1 July 2020, assuming a trade-in allowance of $250,000 was received for the old machine and the price of the new machine was $700,000.

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Answer #1

Solution:

Depreciation charged on old machine for 1 year using sum of digit method = ($600,000 - $100,000) * 4/10 = $200,000

Narre Ltd
Journal Entries
Date Particulars Debit Credit
1-Jul-20 Equipment (New) Dr $700,000.00
Accumulated depreication - Equipment Dr $200,000.00
Loss on sale of equipment Dr $150,000.00
            To Equipment (Old) $600,000.00
            To Cash $450,000.00
(To record exchange of equipment)
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