 Hello in this lecture we will work some test type questions, questions that could be small enough to be formatted in a multiple choice type question. So we have company installed a manufacturer machine in its production facility at the beginning of the year at a cost of 93,000. The machine's useful life is estimated to be 20 years, a 390,000 units of product with 7,000 salvage value. During the second year the machine produces 15,600 units of product determine the machine's second year depreciation under the straight line method. So the key here is the straight line. One of the issues here is that they give us more information than when we need for the straight line. So obviously this number of units produced we would only need that if we did the units of production method and so that could be a bit confusing. This problem actually being much more straightforward than it would look by the amount of information given. So how do we calculate the straight line depreciation for any year including the first year or the second year? And of course they're not telling us if we started at the beginning or the end so we don't have any half year convention happening. So we're just going to take the cost here that we got the cost of 93,000. The thing to remember with straight line is that we do need to reduce the salvage value, salvage value being the amount that will be valued as of the end of the time period 20 years in this case. So we've got to reduce 7,000 before we apply the straight line. So we're going to say this equals the 93,000 divided I mean sorry minus 7,000 and that's going to be the amount to be depreciated. So that's the amount to be depreciated. I'm going to go ahead and underline this home tab font underline so that's going to be depreciated over the number of years which is of course 20. And so we're going to have 20 years and we're going to divide by that. That means that we're going to have 86,000 divided by 20 and that will give us 4,300 depreciation per year and that will of course be for the second year as well as the first year as well as every year for 20 years. And once 20 years is up of course if we multiply this times 20 and we had depreciated for 20 years 4,000 three times 20 we would then have this 83, 86,000 in accumulated depreciation leaving us the amount as of the end of that date equaling to the salvage value. That's why we have to subtract that salvage value out. Next one says that an asset book value is 18,100 on December 31st year five. The asset has been depreciated at an annual rate so it's going to be property, plant, and equipment type of asset. The annual depreciation is 3,100 on a straight line method assuming the asset sold for 15,100 the company should do. So we could start to record this transaction. There's going to be a transaction that will be taking place and the first question I usually ask is cash affected. We're going to say yeah cash is affected we sold the asset and we got cash. So we're going to have cash and the asset had a book value and a straight line the asset was sold for 15,100. And then something's going to go off the books here which is going to be the equipment or the assets whatever the asset was some type of property, plant, and equipment. Now the problem is when the asset is going off the books there's two pieces to it. One there's the cost of it and then there's the accumulated depreciation related to it. So we could have the book value was 18. So if the book value is 18,1 how do we get to the actual cost because the book value is the cost minus the accumulated depreciation. And then they said that the accumulated depreciation or the depreciation per year is 3,100 and we're in year five so it's in year five at this point. So if we take the 3,100 and if five years have passed for a straight line then we have total depreciation that has accumulated to be 15,500 given us a cost of the 18,1 plus the accumulated depreciation. So notice we usually think about that the other way we usually think about okay we bought it for the 33,6 and then the accumulated depreciation is the 15,5 therefore the book value would be equal to the 33,6 minus the 15,5 to give us that 18,1 that is left over. So we kind of reversed into that obviously if we had a trial balance we would have both numbers given to us in that case or you know a backup schedule that would give us the values. All right so that means that we can debit cash and then the asset's going to go off the book at the cost with the cost is credit which I'm going to represent with a negative 33,6 that's the cost and then we have to have the accumulated depreciation. So of course assets going up because assets to debit I mean cash is a debit and it's an asset so we're going to make go up by doing the same thing to it which is a debit and then this asset has to go off the books which is the property plant and equipment assets have a debit balance we need to make it go down by doing the opposite thing to it so we credit it and then we have the accumulated depreciation remember that's a counter asset account so that means it's an asset but it has a credit balance we need to make it go down because we need to make it go away for this particular asset and so we're going to do the opposite thing to that which would be a debit so we're going to debit the accumulated depreciation of 15,5 and note of course that the credits and the debits here that's that's representing the difference of that 18,1 the book value now we have the plug being the cash less the book value what's the difference there and so we have the debits 30,006 being less than the 33 so we're going to need another debit to plug this so we can say okay it's the 30,006 minus the 33 6 so we could think about it that way the credits are 33 6 the debits are this plus this or 30,006 and that would be this minus this means we need a plug on the debit side of that 3,000 that would be the plug I'm going to do it with a sum formula negative sum I'm going to sum these which means I want this plus this minus that but then flip the sign so it's the debit so that's the plug so that the three debits 33 6 add up to the credit now what account does that need to go to well we can see that the book value is less than the cash we got which makes sense because if it's a debit that means it's going to be like an expense because debits are expenses on the income statement it's going to be a loss in this case if it were to be a credit that's kind of similar to revenue which has a credit balance which would be income so this is a loss on sale so a multiple choice could question could ask you basically any of this they can ask for the whole journal entry they might ask you for just part of it what's going to be the debit what's going to be the credit what's going to be the net income or loss and it's best oftentimes to just write out the entire journal entry if possible because that will allow you to not make mistakes on assuming what happens and having the debits and credits go in the wrong way or something like that next one says that a company purchased a machine for 315 850 the machine that has a useful life of eight years and residual value of 17 five it is estimated the machine could produce 765 thousand units over its useful life in the first year 112 thousand 500 units were produced in the second year production increased to 165 units using the units of production method what is the amount of depreciation expensive that should be recorded for the second year so key is the second year now again they gave us some information we don't really need in this case and that is that they gave us the useful life and we would need that if we use the double declining method or the straight line method but in this case we basically just need to calculate it not based on time value but based on the machine hours or whatever units units in this case that we're going to use so we don't really need the eight years per se we might want to estimate that for other reasons but what we do need is going to be the measurement based on the units of production so we need the total units that will be produced for the entire lifetime of the machine as well as the units per year we'll have to count the units per year and so we're going to take the cost here the cost is going to be 315850 we're going to take out the salvage value just like we kind of do when we do the straight lines less the salvage value of 175 remember the salvage value is what we think we could sell it for after it's been basically used up kind of I think of it kind of like the scrap you could sell it for scrap so then we have the 315850 minus the 175 salvage this is the amount that we want to depreciate over its useful life not measured in time but measured in the units that we estimate it will be produced so we have the amount to be depreciated and what we're going to do is we're going to divide that by the estimated that the total amount that will be produced so and that's going to be here it is estimated that the machine could produce that many units over the useful life so so units over the life the useful life we think it's going to produce 765 000 that's a key component might be on the box you can think of it as a printer you got on the box it says it's going to produce 765 000 pages on it and we'll go ahead and go to the home tab underline that if that's the case then the cost per unit would then be what it would be equal to the cost less the salvage value that we're going to take it down to divided by the units over its useful life we're going to add decimals here i'm going to go to the home tab numbers add decimals so it's 39 cents per units 39 cents per units and then we're going to take that and we're just going to have to then count how many units again if it's a printer we'll have to count the pages that are produced and it doesn't matter if it's year one or year two your your one doesn't affect year two unless we happen to print or produce more units than was estimated for the life so we can't obviously go over the 765 000 units because then we'll over depreciate it and we'll go below the salvage value but as long as that's not the case then we don't have to calculate year one before we can calculate year two so we're going to say units produced produced in year two which was this uh one sixteen five hundred one one six five so unlike the double declining balance we can go straight to year two and just take okay it costs 39 cents per unit that's what we're estimating times the one sixteen five and that gives us the depreciation for year two at the 45 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