 Hello and welcome to the session. This is Professor Farhad. In this session, we would look at an actual CPA simulation that's covered on the exam. And this simulation is actual because it's released by the AI CPA. The AI CPA is the organization that administer the CPA exam. So this is the real deal. So I'm going to show you how to approach each simulation on the exam day. And this way you will not be intimidated by those questions. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, tax, and finance lectures. This is a list of all the courses, including hundreds of CPA questions. On my website, farhadlectures.com, you will find additional resources such as PowerPoint, slides, note, multiple choice, true, false, and if you're studying for your CPA exam, 2,000 plus CPA questions. Let's go ahead and take a look at this simulation. The first thing you want to do is you want to read the simulation and notice here there's no exhibits, which is good, but you have to read the simulation very carefully. Everything is given within the simulation. Now I'm going to tell you, I'm going to read this simulation for you first, and I'm going to tell you how it can be given to you in another format. So this way, you should not be intimidated. And this simulation is basically an exercise in an intermediate accounting textbook. So in my intermediate accounting, I will give exercises similar to this one. And that's why when I say, if you review, if you review your college exercises, you are technically studying for your CPA simulation, because all that the simulation is, is an exercise or a problem from the end of each chapter. So let's take a look at it on January 1st, year one, Lex company purchase equipment. What I'm going to do, I'm going to go ahead and grab this so I can highlight as I'm going through it. On January 1st, year one, Lex company purchase equipment for 90,000. In addition to the purchase price, Lex paid 6,000 in sales tax, 1,600 in shipping cost, 3,000 in personnel training cost, 2,400 in installation cost. The equipment has an estimated salvage value of 10,000, total estimated use for life of 10 years. Now without even reading any further, you should be heading into, they might be asking me about depreciation. Why? Because when they're giving you information like this, you should be heading into depreciation. So breathe, you should know your depreciation. So let's keep going. Lex uses the straight line method of depreciation and record depreciation expense annually. As I expected, it's about depreciation. Okay, now the same information, this same information here, which is the cost and the additional expenditure, it can be given to you in a form of exhibits. So rather than telling you the purchase, the equipment for 90,000, they might give you a purchase invoice rather than telling you the shipping cost is 1,600, they might give you a shipping invoice. It does not matter. You just have to kind of calm down, relax and know what you are being asked. But that's all what you are giving here. But all this information, I could give you the same information in three different exhibits and intimidate you on the exam day. Or I can give you this in a narrative, which is, you are very familiar with it. So when you see those exhibits, don't get, don't panic, don't panic, because all what it is, it's additional information. On January 1st, year two, on January 1st, year two, the estimated life was revised to a total of five years. So notice the life here was 10. Then they revised the life to five from the date of the purchase. And the estimated salvage value was reduced to 5,000. It used to be 10,000. They reduced the salvage to five. This is additional information. It was the result of the increase in the production. That's fine. Whatever it is, we would live with that. The equipment was sold for 55,000. So we sold the equipment on July 1st, year three, for the situation below, record the appropriate journal entry. So here's what we are told. Click on the cell and the account name column and select the appropriate account. An account may be used once or not at all for all journal entries. Enter the corresponding debit or credit amount at the associated column. All the amount will automatically be rounded to the nearest dollar. Not all rows in the table might be needed to complete each journal entry. If no journal entry is needed, check no journal entry required. So the first question is, prepare the journal entry for depreciation. Pretty straightforward, four year two, not very straightforward. So here what they want is the depreciation expense in four year two. Now immediately what you would do on the exam day, you will select depreciation expense debit, credit accumulated depreciation. Whether you have time to compute the numbers or not, you immediately compute the depreciation expense. To compute depreciation, you have to know the cost of the asset. You have to know the life and you have to know the salvage value. Okay, let's find what these three items are. The cost of the asset. Well, we purchased the asset for 90,000. Is that part of the cost? Yes. We paid sales tax of 6,000. Is that part of the cost? Yes, sales tax is part of the cost of the asset. We paid 1,600 for shipping. Is that part of the cost? Yes, it is. We paid 3,000 in personnel training cost. Is that included? Well, we are not told anything about the training cost. Are they related to the asset or not related? We're not told anything. Therefore, we cannot assume it's part of the asset. 2,400 in installation cost. Well, installation cost of the asset, that's part of the cost. The estimated, the equipment has an estimated salvage value of 10,000. So now we can determine the cost. Okay, so what was the cost? The cost is the purchase price plus 6,000 in sales tax plus 1,600 in shipping cost plus 2,400 in installation. The total cost is 100,000. The salvage value is 10. The life is, the salvage value is 10,000, which is giving, which is right here, and the life is 10. So, but they're asking us for year two. Let's compute year one because in year two we made an adjustment. So year one, we have a cost minus salvage divided by life of 10. So 90,000 divided by 10 equal to 9,000. So year one, depreciation expense 9,000, accumulated depreciation 9,000. But that's not what we are being asked. We're being asked for year two. Now why year two is important? Why is this problem a little bit more challenging? Because if they're asking you for year one, year one is pretty straightforward and make sure don't fall for year one because they're asking for year two. But at least debit depreciation expense, credit accumulated depreciation. So what happened in year two? Here's the information that we are told in year two. Now this same information could be given to you in an email. So I can, you know, I can email, the manager can email the account and telling them this is what happened to the asset. The asset, we revise the life of the asset, the five and change its salvage value. So rather than this narrated thing, narrated paragraph here, you know, they could give it to you in a form of an exhibit as an email communication between two individual. Well, it's not a big deal. All what happened is the life changed. So the life of the asset went down to five. Let me change the colors here. So this way, you know, I'm dealing with a new asset. The life went down to five years. The salvage went down to 5,000. This is what happened. Now I need to recompute depreciation again. So when I have a revision and depreciation, revision and estimate, what's going to happen is this. The original cost was 100,000. I'm going to deduct 9,000 for year one depreciation. Therefore, I have a new asset with a book value of 91,000. Now this asset, this $91,000 asset will have a new salvage value of five and a new life of five, a new salvage value of 5,000 and a new life of five. So 91 minus five divided by, I'm sorry, the remaining life is four because it's five as of the beginning of the year. So we have to be careful here. Here what we are told, total of five years from the date of the purchase, one year went by total four. So the estimated, not the estimated, the expense for year two is 21,500. And that's it. I answered the first question. And all what it took is knowing how to compute depreciation. So I need to do what? I need to do what? Debit, depreciation expense, credit accumulated depreciation. And this is what you should do before you even compute the number. So you're going to get a credit for those two. And the answer is 21,500 for year one, I'm sorry, for year two debit and 21,500 credit accumulated depreciation for year two. I'm done with the first question. Notice they gave you more, more journal entries to make. But that's it. All what they're asking you is the depreciation expense for year two. The second entry is prepare the journal entry to record year three sale and any necessary adjustments. So what they want you to do here is to prepare the journal entry for year three sale. What are we told? We are told that the equipment was sold July 1st, year three. Now, the first thing you need to know about depreciation, I'm sorry, about the sale of equipment is the depreciation has to be up to date. So the first thing I have to do, I have to book the depreciation as of July 1st. What does that mean? That means I have to book the depreciation for January, February, March, April, May, June for six months, for six months. Let's go back and take a look at the depreciation to see how am I going to do? How am I going to book the depreciation? And why booking the depreciation is important? Why do I have to do that first? Why that's important? The first thing I have to do is make sure my depreciation is up to date. The total depreciation per year is 21,500 times 612 because I only need to book the depreciation for six months. And that's going to give me 10,750. So that's my depreciation for year one. That's my depreciation, I'm sorry, half of year one. That's my depreciation as of July 1st. That's my depreciation. Now, the second thing I have to know is what's my book value? What's the book value of the asset? Why do I need to know the book value? Because when I sell an asset, I have to determine whether I have a gain or a loss or a loss. So they determine the gain or the loss. I'm going to compare the cash that I received, which is 55,000 versus the book value. Now, how do you compute the book value? Well, the book value is cost minus accumulated depreciation. The cost of this asset is 100,000. We took 9,000 of depreciation in year one. 9,000 in year one. We took 21,500 in year two minus 21,500 in year two minus 10,750 year three. 10,750 year three. So the book value of this asset, the book value of this asset, let's compute the book value because we need to do so. Let's find the book value. So we're going to take 100,000 minus 9,000 minus 21,500 minus 10,750, 58,750. So the book value is 58,750. The book value is 58,750. I sold it for less. That means I have a loss of the difference 3,750. That's my loss. So I have a loss of 3,750. So I know my depreciation, how much I need to book depreciation. I know my loss. Let's see if I can book this entry. So let's go ahead and look at this. So the first is I have to book depreciation expense for half a year, and that was 10,750. That's the first thing you have to know. Then you have to debit your loss. I already told you my loss is loss on disposal. We already find out the loss is 3,750. I have to remove my accumulated depreciation. Well, my accumulated depreciation for year one was 9,000. For year two was 20,500. So my total accumulated depreciation is 30,500. That's my total accumulated depreciation. I have to remove that. I also received cash. So I have to debit cash. I mean, make sure to start with cash because it's easy. You receive cash of 55,000. Then you have to dispose of the asset. You have to get rid of the equipment. You have to credit equipment, credit equipment, 100,000. Now, before you proceed, because make sure your entries balance. So make sure you pull your calculator here because this way you can check yourself, pull your calculator and add up all your debits. 10,750 plus 3,750 plus 30,500 plus 55,000. This is going to add up to my 100,000 credit. This looks good 100,000. So notice, as I told you earlier, it looks, this problem does not look as intimidating if you are familiar with property, plant, and equipment. So you need to know how to, basically what they're asking you here is, you do know how to book the appreciation after the revise of the asset, after we revise the life and the salvage value of the asset. It's something you learn in Accounting 101. Then they ask you to dispose of the asset and it was at a loss. Also that's taught in Accounting 101 as well as intermediate accounting. However, this information could be given to you in a very intimidated manner. For example, rather than telling you it was sold 455,000, I can give you a sales invoice. 455,000 make it look very complicated, but all you're looking for is how much was it sold for, which is 55,000. So if you want to be comfortable, if you want to be comfortable with those CPA simulations, go to my website and learn about property, plant, and equipment, and intermediate accounting. You study for your CPA once in your lifetime. Make sure you invest widely. Use all your resources, my website, my YouTube, I'm here to help you. Good luck and study hard.