Liberty Company purchased four identical machines on January 4, 2016, paying $9,000 for each machine. The useful

Question:

Liberty Company purchased four identical machines on January 4, 2016, paying $9,000 for each machine. The useful life of each machine is expected to be five years, with no salvage value expected. The company uses the straight-line method of depreciation. Selected transactions involving the machines are listed below. The necessary accounts for recording these transactions are also given.

INSTRUCTIONS

Record the transactions in general journal form. Use the following accounts, as necessary.

ACCOUNTS

101 Cash

541 Depreciation Expense-Machinery

141 Machinery

595 Loss on Sale of Machinery

142 Accumulated Depreciation-Machinery

596 Loss on Trade-In of Machinery

495 Gain on Sale of Machinery

597 Fire Loss on Machinery

DATE TRANSACTIONS FOR 2016

Jan. 4 Paid $9,000 each for four machines.

Dec. 31 Recorded depreciation for the year on the four machines.

DATE TRANSACTIONS FOR 2017

Mar. 31 Machine 1 was destroyed by fire; no insurance was carried.

Dec. 31 Recorded depreciation for the year for the three remaining machines.

DATE TRANSACTIONS FOR 2018

Oct. 2 Sold machine 2 for $4,400 cash.

Dec. 31 Recorded depreciation for the year on the two remaining machines.

DATE TRANSACTIONS FOR 2019

May 28 Traded machine 3 for a similar machine (no. 5) with an $8,800 price and fair market value. A trade-in allowance of $2,800 was received. The balance of $6,000 was paid in cash.

Sept. 3 Traded in machine 4 for a similar machine (no. 6) with a $9,200 list price and fair value. A trade in allowance of $2,000 was received. The balance was paid in cash.

Sept. 3 Assume that the company somehow has adopted a policy of recording trade-in transactions using the rules required for federal income tax purposes-even though the cost of assets and the depreciation are determined under financial accounting rules as you have computed them previously in this problem. Give the entry that would be recorded on September 3 to record the trade-in of machine 4 on machine 6, using the facts given.

Analyze: What is the difference between the financial accounting entries and tax entries for the trade-in of machine 4?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...