Journal Entries for Machine Acquisition, Depreciation, Damage, and Insurance Recovery
Comprehensive accounting treatment for asset lifecycle events
Key Highlights
- Asset Lifecycle: Detailed journal entries covering acquisition, scheduled depreciation, asset damage, and subsequent insurance recovery.
- Depreciation Calculation: Use of straight-line method at 20% per annum with mid-year adjustment for the period before damage.
- Insurance Recovery: Recognizes claim received in three equal installments that offset part of the loss due to damage.
1. Acquisition of the Machine
Initial Recording (January 1, 1995)
On January 1, 1995, XYZ Company purchased a machine for 500,000 Dhs and paid for it via cheque. The transaction reflects an increase in fixed assets and a simultaneous decrease in bank balance. The following journal entry documents this acquisition:
Journal Entry for Acquisition
| Date | Account Title | Debit (Dhs) | Credit (Dhs) |
|---|---|---|---|
| Jan 1, 1995 | Machinery | 500,000 | |
| Jan 1, 1995 | Bank | 500,000 |
2. Depreciation of the Machine
Annual and Partial-Year Depreciation
The machine is depreciated using the straight-line method at a rate of 20% per annum. This implies an annual depreciation expense of 20% of 500,000 Dhs, which equals 100,000 Dhs. Since the machine was used for the entire year of 1995 and for the first six months of 1996 until it was damaged by fire, depreciation entries need to be recorded accordingly.
Depreciation for 1995
For the full year of 1995, the depreciation expense amounts to 100,000 Dhs. This entry reduces the asset's book value while simultaneously charging a depreciation expense.
| Date | Account Title | Debit (Dhs) | Credit (Dhs) |
|---|---|---|---|
| Dec 31, 1995 | Depreciation Expense | 100,000 | |
| Dec 31, 1995 | Accumulated Depreciation | 100,000 |
Depreciation for January 1 – June 30, 1996
As the machine was operational for six months in 1996 before being damaged by a fire on July 1, 1996, depreciation for this half-year period is recorded. A half-year depreciation equals half of the annual expense:
\( \text{Half-Year Depreciation} = \frac{100,000 \text{ Dhs}}{2} = 50,000 \text{ Dhs} \)
| Date | Account Title | Debit (Dhs) | Credit (Dhs) |
|---|---|---|---|
| Jun 30, 1996 | Depreciation Expense | 50,000 | |
| Jun 30, 1996 | Accumulated Depreciation | 50,000 |
By July 1, 1996, the total accumulated depreciation on the machine amounts to 150,000 Dhs (100,000 Dhs from 1995 plus 50,000 Dhs from 1996).
3. Accounting for Damage by Fire
Recognizing the Asset's Impairment
On July 1, 1996, the machine was completely damaged by fire. At this point, it is necessary to remove the machine and its accumulated depreciation from the accounting records. Additionally, the loss incurred on the disposal of the asset is recognized by comparing the asset’s carrying value against its original cost.
Calculation of Book Value
The book value of the machine at the date of the incident is calculated as follows:
\( \text{Book Value} = \text{Cost of Machine} - \text{Accumulated Depreciation} = 500,000 \text{ Dhs} - 150,000 \text{ Dhs} = 350,000 \text{ Dhs} \)
Journal Entry for Asset Write-Off due to Damage
To remove the machine from the books and recognize the loss resulting from the damage, the following journal entry is prepared:
| Date | Account Title | Debit (Dhs) | Credit (Dhs) |
|---|---|---|---|
| Jul 1, 1996 | Accumulated Depreciation | 150,000 | |
| Jul 1, 1996 | Loss on Asset Disposal | 350,000 | |
| Jul 1, 1996 | Machinery | 500,000 |
Here, the "Loss on Asset Disposal" account absorbs the difference between the original cost of the machine and its net book value, ensuring that the full extent of the loss is adequately reported.
4. Insurance Recovery
Recording Insurance Proceeds
Fortunately, the machine was insured with a coverage level of 75% on the original cost. The insurance company agreed to cover:
\( \text{Insurance Proceeds} = 500,000 \text{ Dhs} \times 75\% = 375,000 \text{ Dhs} \)
The recovery is to be paid in three equal monthly installments. Each installment, therefore, amounts to:
\( \text{Monthly Installment} = \frac{375,000 \text{ Dhs}}{3} = 125,000 \text{ Dhs} \)
Journal Entries for Insurance Receipts
As each installment is received, the following entries are recorded. Below is an example for each month:
| Date | Account Title | Debit (Dhs) | Credit (Dhs) |
|---|---|---|---|
| Jul 31, 1996 | Bank | 125,000 | |
| Jul 31, 1996 | Insurance Recovery | 125,000 | |
| Aug 31, 1996 | Bank | 125,000 | |
| Aug 31, 1996 | Insurance Recovery | 125,000 | |
| Sep 30, 1996 | Bank | 125,000 | |
| Sep 30, 1996 | Insurance Recovery | 125,000 |
These entries ensure that each receipt from the insurance claim is accurately reflected in the company’s cash records while systematically reducing the outstanding insurance receivable.
Summary Table: All Key Journal Entries
| Date | Transaction | Account Title | Debit (Dhs) | Credit (Dhs) |
|---|---|---|---|---|
| Jan 1, 1995 | Acquisition | Machinery | 500,000 | |
| Jan 1, 1995 | Bank | 500,000 | ||
| Dec 31, 1995 | Depreciation (1995) | Depreciation Expense | 100,000 | |
| Dec 31, 1995 | Accumulated Depreciation | 100,000 | ||
| Jun 30, 1996 | Depreciation (First Half 1996) | Depreciation Expense | 50,000 | |
| Jun 30, 1996 | Accumulated Depreciation | 50,000 | ||
| Jul 1, 1996 | Asset Write-off | Accumulated Depreciation | 150,000 | |
| Jul 1, 1996 | Loss on Asset Disposal | 350,000 | ||
| Jul 1, 1996 | Machinery | 500,000 | ||
| Jul 31, 1996 | Insurance Recovery | Bank | 125,000 | |
| Jul 31, 1996 | Insurance Recovery | 125,000 | ||
| Aug 31, 1996 | Bank | 125,000 | ||
| Aug 31, 1996 | Insurance Recovery | 125,000 | ||
| Sep 30, 1996 | Bank | 125,000 | ||
| Sep 30, 1996 | Insurance Recovery | 125,000 |
References
- Journal Entry for Purchase of Machinery - Accounting Capital
- Depreciation Journal Entry - WallStreetMojo
- Journal Entry for Insurance Claim - Accounting Basics for Students
- Journal Entry for Loss of Insured Assets - GeeksforGeeks
-
Record Journal Entry for Insurance Claim - Audithow
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Last updated March 12, 2025