 Hello in this lecture we're going to work some smaller test type questions that could be of a size that could fit into multiple choice type questions. So we have here a company old machine that cost $52,000 had an accumulated depreciation of $40,800 was traded on a new machine having an estimated 20 year life with an invoice price of $63,200. The company also paid $53,800 cash along with this old machine to acquire the new machine if this transaction has commercial substance the new machine should be recorded at what so you could get it's easy to get this confused with the rules basically for gap and rules for the tax code tax code you might have some kind of like kind exchange here we're just going to put the new machine on the books at the cost of the new machine basically and we're going to have to take off the old machine and see if there's any difference so let's try to record this transaction I like to think of it as a basically a journal entry so I'm going to build the journal entry I'm not going to put the debits on top and the credits on the bottom because I'm just going to try to build it with what I know best and and put the debits and credits where they land in that order so first thing I usually ask is cash affected and we know that the company paid cash $53,800 so I know cash then it's going to go down cash as an asset has a debit balance we're going to make it go down by doing the opposite with your credit I'm going to represent the credits with a negative number therefore we got $53,800 so that I know that happened for sure the company sold its old machine here so the machine cost $52,000 so it went on the books at $52,000 it didn't go down directly accumulated depreciation is going to go down therefore the machine is still on our books at $52,000 and it's got to go away because we're getting rid of it it's an asset we're going to make it go down by doing the opposite thing to it so the machine and what we'll call it old machine so we can distinguish it from the new machine that we will be putting on it's going to have to be a credit of $52,000 okay but there's going to be accumulated depreciation related to it to the to the old machine right so we got to take that off the books whatever depreciation is related to it in that separate account it's a credit bounce accounts a contra asset account we need to make it go down so we're going to do the opposite thing to it which would be a debit so the accumulated depreciation was $40,800 so the book value of the machine was this $52 minus the $40,800 or $11,200 that's the value of the machine that we have left on the books now what did we buy we got a new machine we got a new machine we traded in this old machine which costs $11,000 we're going to put the new machine on the books at the price the sticker price assuming that's a fair price so this we got the new machine goes on the books and it's an asset so we're going to put it on the books at the cost which in this case they're saying is $63,200 and and they also pay cash so that's that's everything that happened we paid cash we we gave them the old machine which has a value of to us $11,200 and we acquired the new machine so now if we added up our debits and credits we add up the debits and we add up the credit equals the sum I'm just going to add up the credits here we have a difference of course here and the difference is going to be this minus this meaning that the credits are beating the debits by that $1,800 meaning we need another debit so we need another debit I'm going to do that with my like plug formula I'm gonna say this is the negative sum of these so notice these are negative credits and these are positive debits and therefore it's going to take the difference and flip the sign to the plug so that now if I add up my debits and credits they add up to zero and they add up to zero here so that's the plug we need to make this work and the question is what account would that go to and if we did this transaction it's either going to be a gain or a loss we made a sale here and and we got compensation for it and that compensation being in the form of cash in a new machine so in this case it's going to be a loss on the sale because because it's a debit and debits if we're on the income statements are kind of like expenses expenses bringing the net income down so depending on what they ask for the new machine is going to go on the books at this time at the 30 62 63 200 remember this isn't the tax code this is going to be this is generally accepted accounting the accounting and then we're going to have a loss on the exchange of this one thousand eight hundred next one says that a company owns the equipment that costs one hundred thousand seven hundred with accumulated depreciation of sixty eight thousand eight hundred company asked thirty six eight hundred for the equipment but sells the equipment for thirty four two hundred compute the amount of gain or loss on sale so I tend to think about these in terms of journal entries so I'm going to work out the journal entry so we're going to say that there was a sale that happened so is cash affected I'm gonna say yeah we got cash cash is affected cash is an asset it's gonna go up with a debit and the company asked for sixty thirty six eight that's like the starting price but it actually got thirty four thousand two hundred so of course that's the number we're going to use the number that we actually got on the transaction so that's the cash and then we're going to take the equipment off the books so equipment has got to go off the books it's an asset we're going to take it off the books by doing the opposite thing to it which is accredited assets have debits we're going to credit to make it go down so remember it's on the books with two account it's on the books with an asset account and a contrast that account the equipment account and the accumulated appreciation account so we're going to put the equipment account we're going to take off the books for the seven one hundred thousand seven and then we're going to take the accumulated appreciation which I'm going to abbreviate has to go off the books it's a contrast account meaning it has a credit balance we need to do the opposite to take it off the books therefore we're going to debit it sixty eight eight hundred and then we look at what the difference is again so if we add up the debits they add up to this and if we add up the credits they add up to of course this and then if we take the difference between the debits and the credits we we can then see that I'm going to add them because there's ones and then positive ones next we could see that we have a difference of two thousand three hundred in this case the debits are winning therefore we need a credit to balance this out so we need a credit over here I'm going to do this with our negative sum function our plug function which is negative sum meaning I want to take the debits or positive numbers minus the credits or negative numbers the way they format it here and then flip the sign and that'll give us our plug putting us back in balance in this case and then the only question is well what should that amount be and in this case it's a credit it's going to be on the income statement so this is going to be a gain on sale why is it again on sale because of course we got cash of the thirty four two and the equipment has a book value of this minus this which is the thirty one nine so thirty four two minus the thirty one nine means we got more cash than it was on our books for resulting in the game it's going to have to go on the income statement next one says that a company installs a manufacturing machine in its production faculty facility at the beginning of the year at a cost of one fifty four thousand the machine's useful life is estimated to be five years or three hundred and seventy thousand units of product with a six thousand salvage value during its second year the machine produced fifty nine thousand two hundred units of product determine the machine's second year of depreciation under the units of production method alright so we're going to use the units of production method therefore they gave us once again some information that's not entirely needed meaning they gave us the number of years we're not measuring in the number of years in this case we are measuring in the usage that's what we're going to use to drive the measuring so we're gonna start as we would with all of our depreciation methods generally with the cost the cost of being in this case one fifty four thousand we will take out the salvage the amount that will be the value of the machine after the useful life meaning after it's printed this many units of product gonna go ahead and go to the home tab font group and underline that subtract this out we're gonna say this is the one fifty four thousand minus the six thousand gives us the one forty eight the amount to be depreciated so now we need to figure out the amount per unit how much does it cost per unit so the the amounts per unit we need to have the total units to be produced so the total units that could be produced are three hundred and seventy thousand units so we're not gonna take the five years we're gonna measure it in terms of units if we divide that out we're gonna say this is the one forty eight thousand cost divided by the number of units that we think can be produced over the useful life of this and that will give us if we go to the home tab numbers group and increase about forty cents per unit so this is the cost per unit or depreciation per unit that we will charge then all we need to do is count the units and again we'd have to count the units that's the problem with this type of method over just using time like a year it's easy to know that a year has passed if we're using units we need to count the number of units that have passed within the year and in this case we're just looking at year two so in second year the units produced in year two would be this 59 to and that's going to be then equal to the cost per unit times the 59 to units produced and this is the D pre expense for a year to next one says that an assets book value is 64,800 on January 1st year 6 the asset is being depreciated 9,900 per month using the straight line cost method assuming the asset is sold on July 1st year 7 for 46600 the company should record what now I'm gonna think about this in terms of a journal entry that we're gonna have a journal entry on there and I'll record what we have and the multiple choice question could ask you for any piece of the journal entry they could say well should this be debited or that be credited I would write out the entire journal entry if possible that'll help you to stop making mistake or reduce the likelihood of making mistakes by debiting when you should have credited and whatnot like that so I'm gonna say first is cash affected and it was sold for the 46,600 we sold it therefore we got the cash so I'm gonna say cash is gonna go up by the 46600 so that much we know we know that the equipment's got to go off the books so whatever the asset is it's a fixed asset of equipment it's gonna have to go off the books and then we're gonna have to account for the accumulated depreciation D pre all right so we have the asset has a book value so we don't really know what that book value means it's it's that we don't know what the cost is versus the accumulated depreciation but as of that point in time I'm kind of I'm gonna treat that as kind of like the cost at that point in time and so I'm gonna say it has a cost at this point of the 64,800 and then we're gonna have to calculate the added depreciation that's gonna take place from July or January of year 6 to July of year 7 and they gave us the monthly depreciation on that so if we're saying it's 900 a month and we of course had 12 months in year 6 and then how many months in year 7 it happened in July which is month number 7 but note that it's in July 1st therefore it we're actually going through June so January February March April May June if we count it on our fingers not July because July 1st is what we're talking about so it could and that's and they could completely try to confuse you by doing that instead of saying June 30th or they say July 1st so we're gonna take it's gonna be equal to the 12 months in the first and year 6 and then another six months in year 7 so we're talking 18 more months of depreciation so we've got 9,000 times 18 more months that's the added accumulated depreciation over this book value so that's the asset let's say original book value and we'll group those two together we don't know the breakout between the book and the in the asset but we know that the accumulated depreciation added that we're gonna have to take off the books now because it would have accumulated upwards to accumulate depreciation has a credit balance we're gonna make go down by doing the opposite thing to it we're gonna debit it by that 16,200 and then of course if we look at the debits and credits now we can see that whether the debits and credits are equal and of course they most likely will be not and we're gonna say the difference between the debits and credits then is 2,000 looks like that should be a debit I'm gonna plug that in with our negative sum function our plug formula negative sum meaning that I want to take the debits positive numbers minus the credits negative numbers then flip the sign giving us the plug that we need in order to put this in balance then the only question is what should that account be and in this case it's gonna be a loss on sale why is it a loss well one it's gonna be on the income statement and it's a debit and that would indicate that it's kind of like an expense gonna decrease net income it's a loss also we can say well the book value now is the book value at the beginning plus the added accumulated depreciation or minus the added accumulated depreciation means that the book value is 48,600 and we sold it for 46,600 so we sold it for less than we currently had it on the books for by the 2,000 therefore we have a loss that will have to be recorded on the income statement