(a) A machine was bought on credit for £15,000 from the XY Manufacturing Co Ltd, on 1 October 20X1. The estimated useful economic life of the machine was seven years and the estimated scrap value £1,000. The machine account is to be maintained at cost. Financial statements are prepared annually to 30 September and the straight line depreciation method is used on machines.

Required:

• Prepare the journal entries and ledger accounts to record the machine and its depreciation for the first two years of its working life.
• Illustrate how the machine would appear in the balance sheet at 30 September, 20X3.

(b) The machine was sold for £7,500 cash to another manufacturer on 1 October 20X4. A new replacement machine was bought on credit for £18,000 from the XY Manufacturing Co Ltd. It also has an estimated useful economic life of seven years but its estimated scrap value is £1,200.

Required:

• Prepare the machine account, the accumulated provision for depreciation account and the machine disposal account for the year to 30 September 20X5.
• Repeat (a) but this time assume that the selling price of the old machine was £12,000.