Question
Aldergrove Farms acquired a machine and later disposed of it. The company depreciates machinery on a straight-line basis.
| Date | Event |
|---|
| January 1, 2024 | Purchased machinery for $80,000 cash. Estimated useful life 8 years; residual value $8,000. |
| December 31, 2024 | Recorded the annual depreciation charge. |
| December 31, 2025 | Recorded the annual depreciation charge. |
| January 1, 2026 | Sold the machinery for $65,000 cash. |
Required: Prepare the journal entries for the purchase, each year’s depreciation, and the disposal. The annual depreciation is (80,000 − 8,000) ÷ 8 = $9,000. Determine the carrying amount at disposal and record the resulting gain.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 16 — Property, Plant and Equipment
Depreciation spreads the depreciable amount — cost less residual value — over the asset's useful life. Establish the depreciable amount, the method and the period of ownership within the year before computing anything; a mid-year acquisition or disposal is charged only for the months held.
Common mistakes
- Deducting residual value under the reducing-balance method, where the rate applies to carrying amount instead.
- Charging a full year on an asset bought or sold part-way through the period.
- Continuing to depreciate an asset once its carrying amount has reached residual value.
Further readingStraight-line depreciation, worked