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The following accounts appear in the general ledger of the Bruce Corp. at December 31, 2014.
Machine 1 was estimated to have a useful life of six years, with a residual value of $400. On January 31, 2016 machine 1 was traded in for machine 2. The purchase price of machine 2 was $8,000 and Bruce Corp. received a trade-in allowance of $4,500.
Machine 2 is estimated to have a useful life of eight years, with a residual value of $1,000. The fair value of machine 1 was $4,000 at the date of the trade-in. Assume the company uses the ½ year rule to calculate depreciation expense in the year of acquisition and disposal.
Required:
- Prepare a journal entry to record the trade-in of machine 1 for machine 2.
- Post the appropriate parts of the entry prepared in 1 above to the general ledger accounts and calculate the new balance in each account.
- The installation cost of machine 2 amounted to $500 and was recorded in the Repairs and Maintenance Expense account when paid. Assume this amount is material. Prepare an adjusting entry at December 31, 2016.
- Prepare the entry to record the depreciation expense for 2016. (Assume the adjusting entry required in 3 above has already been made.) Post the appropriate part of this entry to the Accumulated Depreciation account and calculate the new balance in that account.
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