 to giving a book value of 24, 300. All right, so we're gonna post that out once again to our trial balance over here. We're now going from year two to year three. We can see in year three, we have the capital which now consists of the equity from the prior period plus the income is now the beginning capital. We're assuming we earned another 100,000 this year. It's not the same 100,000 as last year. That's what we have earned so far this year. We're gonna have the only expense that we're gonna recognize being the depreciation so that we can see the effect of it here. We can see the book value before we post this is the 85 to the 85 to. So then we're gonna debit depreciation expense and credit accumulated depreciation as we always do in the adjusting entry for depreciation. And if we do that, then we see that the accumulated depreciation goes up to 233.2 in the credit direction as we see in our table and the debit of the equipment less the credit of the accumulated depreciation gives book value 24.3 which is the same as the table and the depreciation expense then is 60,900. The effect on that income now is that we have revenue of 100,000 less the 60,900 and therefore we have an income of 39,100 in this case. Now, something to note as we go, you'll note that if we look at this number here, obviously it is different. The accumulated depreciation is different than the depreciation. And you might be thinking, well look, the journal entries that are being hit to these two accounts are exactly the same and opposite. So why is it that this is not a credit of 233.2 and this is a debit of 233.2? The reason being that remember that these accounts down here are temporary accounts meaning they're closing out to the capital account each time. So the depreciation expense will only be the depreciation expense for the current period and then it closes out to the equity section to the capital account in this case. The accounts up here are permanent accounts, they do not close out. So keep that in mind as we go. We're gonna go on to year four and note that in year four, we're gonna have the same kind of issue that we had in the double declining balance. I'm gonna calculate it the same way so that you can see the issue and then we'll go back and take a look at it again. So I'm basically gonna do it the wrong way first but the same way we did it in the prior section and then show you why it's a problem and then fix it. This only happens in of course the last year of this type of method. So let's do it the normal way first. So we're gonna have the units produced in year four and we have seen that there's 15 to units to be produced. Then we're gonna multiply that times the depreciation per unit as we have in the past that number being 50 cents per unit and that will give us the depreciation for year four. So we're gonna post that out. Now I'm gonna change the format of this number. Notice it has a one there but that's because the format is not the same as this format. So I'm gonna go to the home tab numbers group and I'm gonna increase decimals so we can see that 50 cents there. So keep that in mind anytime that you type something and it doesn't do what you think it should be doing. So now I'm in cell C80 equals the 50,200 units produced times the 50 cents per unit and enter that will give us the 7,006. Now let's put that into our table and see if we see anything wrong with this number in our calculation once we look at it in the format of the table. So we're gonna say year four then equals this 7,006, enter. Then we're gonna calculate our book value, the book value being the cost which stays the same less the accumulated depreciation which can be calculated as last year's accumulated depreciation plus the current year's depreciation expense or we can say it's the sum of the depreciation expense over the useful life of the asset being 240,800. Then we're gonna subtract this out that equals the cost 257,5 less the depreciation expense, accumulated depreciation of 248 giving us a book value of 16,7. Now is there a problem, there is a problem with this 16,7 that problem is that it is below the salvage value which we don't want to do. Now once again if there was no salvage value this would be very apparent because we thought the thing was just gonna go to zero, we couldn't scrap it, we would just have to throw it away at that time. It would be very apparent that if we happened to use it for more hours than we estimated it's useful life to be then if we keep on depreciating it the thing would have a negative book value and it just doesn't make any sense of course for us to have a machine on the books which is worth negative 10,000 or something like that, that doesn't make any sense. So clearly we don't wanna go below zero, all we can do is allocate the cost over the useful life, if we go over the cost then one of two things need to happen we need to adjust the estimate possibly or we just estimate it down to zero and that's it, we're not gonna depreciate anymore but we do not do as depreciated below zero or in this case below the salvage value. Remember the salvage value is what we basically think we could scrap it for. So if we still think that we could scrap it for that amount, we have to stop at that amount and this is just the same type of problem we had with the double declining it's just an estimating method and therefore it's not a perfect method it does do the job however and we need to put a plug in at the end to do what we want it to do. So I'm gonna go ahead and delete this and we'll recalculate it, I'm gonna go ahead and delete this and recalculate it and so the last one is gonna be calculated a little bit differently, we can think about it this way we can have the cost of 257.5 and then we're gonna subtract out the salvage value as we did in the initial calculation being 20,000, that's how much we think it's gonna scrap for. Notice it put the decimals there again so I'm gonna go ahead and remove decimals that's in the home tab numbers group and now I'm going to decrease decimals like so and then we can shrink this cell up again. A little bit wider, all right and then I'm gonna go ahead and underline that I haven't been underlining so I'm gonna go to the home tab font and underline this we could underline these items as well so we can see these calculations if you depending on your formatting preferences and then that will equal the amount to be depreciated which we calculated up here as well so it's gonna be the amount to be depreciated and so I'm gonna subtract that out in C80 we're gonna say that equals the 257.5 cost less the accumulated, I'm sorry, the salvage value so if we think about this if we want to leave the books with 20,000 in them at the end of the calculation of the depreciation over the useful life then the amount that we have to depreciate over that time period is 237.5, why? Because 257.5 minus 237.5 will leave us with 20,000 which is what we want to happen because that's the salvage value so now we have to think about well how much have we depreciated so far so I'm gonna say less accumulated depreciation to date, right, before this calculation and we could get that from here or I could calculate it this way we could say it's the depreciation from your one's depreciation expense plus your two's depreciation expense plus your three's depreciation expense and we get the 233.2 it's also this number here that we calculated in our table or the sum of the depreciations this way that 233.2 calculated in that fashion so if that's the case then the difference between those two is what we still need to depreciate in order to bring us up to the 237.5 which will leave us with the 20,000 book value at the end of this whole process so now we're gonna say the depreciation this will equal let's say equals depreciation year four and that will then equal the 237.5 less minus the 233.200 given us depreciation four year four of the 24,300 and again I could underline at home tab font group I'm not gonna do that we can do the underline over here because the cells already underlined that's why we can't use that one and if you want to use the double underline too this is basically the bottom line number for depreciation so you could go to the drop down and hit the double underline for these depreciations too again depending on your preference for that there's also an accounting double underline which I actually can see a little bit less because of once again the format of the cell would have from the boxes around it so it's really up to you on the formatting it'll change from place to place as you work in different places too as to what your place of employment likes in terms of formatting and then once you've been there for a while you can change it to whatever you want so then we got 4003 here and that's gonna be our depreciation expense for year four so then the book value gonna do that calculation the cost will be the same 257.5 less the accumulated depreciation being accumulated depreciation for year three plus the depreciation expense for year four or you could think of it as the depreciation the sum of the depreciation over the useful life being 237.5 then we can do the subtraction problem of equals the cost 257.5 minus the accumulated depreciation up to year four 237.5 which will give us we hope this 20,000 because that's the salvage value all right so now let's do that last transaction in terms of the journal entry so remember we're now going to year three from year three to year four we are on the books at the cost here and the accumulated depreciation given us a book value of 24 three before the journal entry and we're gonna assume that we have the same amount of income that was earned in year four and we can see that we closed out the income in the prior year to the capital account so now we're gonna post this last journal entry a debit to the depreciation expense four thousand three credit to accumulated depreciation four thousand three what happens the equipment still on the books of course for the cost less the 237.5 gives us a book value of 20,000 which equals our salvage value and it equals our worksheet over here what happens next year even if we still use the equipment we do not depreciate it why because it's already at the salvage value and we believe we can scrap it for the salvage value so if we think that the life of it is extended then we may have to make an adjustment otherwise we can't depreciate it any more unless we assume that the salvage value will not be 20,000 so then we're gonna have the depreciation expense being 4,300 so we got the 100,000 being the revenue less the 4,300 giving us net income of 95,7 so there's our net income in this case you can see that it was a substantial amount of a lot it was front loaded again a loss in the first year then we had income then we had a little bit more income and then we had a lot of income in year four and that might be expected in a lot of types of equipment it might be expected that we will get a lot more use out of it in the first years than in the last years because of the wear and tear on the equipment which is one reason that the double declining balance is really a lot of times a valid method to use because it does represent the usage of a machine being that it's more efficient in years one than the later years of its use