welcome
to uh an exercise that deals with about
three different things we're going to uh
continue our discussion of
fixed assets and we're going to discuss
uh asset acquisition and how we record
costs
we're going to record some depreciation
and then finally we are going to uh
dispose of the asset after some time so
we're gonna we're gonna with a very
limited scenario we're going to trace an
asset
um looks like a machine all the way from
asset acquisition all the way through to
disposal or
disposition sale of the asset however
you want to however you want to put it
okay so when we see disposal here that
generally means that we are selling it
for uh for cash
sounds like we're throwing it away right
but we're not that would be retirement
okay so let's look at our scenario here
it says on January the second uh Verdi
acquired a machine for 75 000 in
addition to the purchase price they
spent twenty one hundred dollars on
shipping and installation and twenty six
hundred dollars to calibrate the machine
prior to use
company estimates that the machine has a
useful life of five years and a residual
value of eleven thousand dollars so
residual value is often uh called
salvage value as well so
looks like we don't have any numbers
that we're not going to use that's very
very important because
um you know we need to be able to apply
the rule of purchase price
which is this 75 000 right here and then
we also need to include any one-time
costs
costs
that are necessary to get the asset
whatever the asset is ready for its
intended use so
shipping we're only going to ship the uh
machine one time or it's only going to
be shipped to us one time so that's it
installation we're only going to install
it one time
so this twenty one hundred dollars is
going to count
twenty six hundred dollars to calibrate
the machine prior to use this is called
testing and this is also something that
the at least the first time that we do
it would be added to the assets cost so
let's just come right over here
and add these figures up
because that's the first thing that we
have to do down here
2100
Plus
let's see 2600
going to give us 79 7. move this down a
little bit
okay so um let's see here now there's no
indication that we did not pay cash for
this asset so what we would do is we
would merely
have a debit to a machine and a credit
to cash now in reality we might have
done these items uh not on the same day
but close to the same day and so we
could have up to three different uh
entries for this
uh on and at the end of the at the end
of it our asset value would still be the
same uh 79.7 but this is a lot better
this is a little bit easier
seventy nine thousand seven hundred
for both our debit and credit so our
historical cost for the machine is
seventy nine thousand seven hundred
dollars okay
it says here for B calculate annual
depreciation expense using the straight
line depreciation method and prepare a
journal entry to record depreciation
expense for 2016 okay well
because we're going to be using straight
line depreciation this eleven thousand
dollar right here actually matters so
let's move this up here
we're gonna we're gonna have to
establish our reachable base and so
we're going to subtract from this the
eleven thousand dollar salvage value
okay so our depreciable base is 68.7 and
then we're also going to you be using
this for five years so we can divide by
five and we can get our annual
depreciation amount now notice
that the machine was purchased at the
very beginning of the year so with the
exception of one day uh January the
first we basically have a full year here
so that's what we're going to do now if
we know about the historical cost
principle we know that this Gene must be
left on the balance sheet at 79.7
so how do we get to the net value well
the first thing what we're going to do
is we're going to
utilize the income statement account
depreciation
expense
and of course anytime we see the word
expense
that is a giveaway that we are dealing
with an income statement item and
expenses go up on the left with a debit
and we're also going to take that 13 740
and put it right here
and we're going to adjust the value
artificially remember again 79 7 we
can't touch this on the balance sheet it
has to show 79.7 but we also have to
give an indicator of the net Book value
of our assets
so we're going to use this account
called accumulated
depreciation
okay for 13
740. so this is what we call a contra
asset account it is essentially an
adjustment account for our fixed assets
and so what we would say at this point
is after recording this depreciation
that we have a historical cost of 79.7
um
and we would have a net Book value for
this asset of 65 960. ignore the
negative sign there ignore that okay
so
now that we have the
annual depreciation established as 13
740 we can move on to requirement C and
it says on December the 31st of 2019
Verdi sold the machine to another
company for fourteen thousand dollars uh
prepare the necessary journal entry to
record the sale all right
so we we know that they've given us two
of the four accounts that we're going to
need they've given us cash and
accumulated depreciation and they've
even told us how much cash it's going to
be so we might as well
write that down fourteen thousand
notice that when we take depreciation
expense our accumulated depreciation has
a normal credit balance
so we have a we now have to get this
accumulated depreciation off the balance
sheet you don't have to do anything with
depreciation expense because the the
income statement is going to reset to
zero on the very next day anyway because
income statement accounts are temporary
accounts
however we do need to figure out how
many years we have had this asset and
we've had it for 2016 2017 2018 and
2019. so that means that over on the
balance sheet we have this 13 740 times
4.
and that has to be removed from the
balance sheet
with a debit
we can't leave it on there after we
dispose of the asset all right
we also have to get rid of the machine
itself and that has to come off with a
credit
and um we can I'm going to actually do
this down here and the reason is because
uh just in case you were working on
something uh very close to this
I have a feeling they would want this
down here Maybe not maybe they won't
care so now we have to say Okay what do
we balance here and we can take one look
at it and tell that we don't
so let's just see here what we have 79
700
um
minus
fourteen thousand
minus
54 960.
is 10 7 40. and so we have a debit for
ten thousand
seven hundred and forty dollars and this
is a loss
so losses have a normal debit balance
loss on disposal
machine
okay for the ten thousand seven hundred
and forty dollars now that's all we
actually have to do here losses have a
normal debit balance so they have the
same uh normal uh balance as an expense
and gains if we had dealt with a gain
um
are treated like a revenue they have a
normal credit balance so here's another
thing we need to apply a rule here and
we would say
that we have a loss if the amount of
cash received is lower than the current
Book value now we haven't we haven't
calculated that but actually we have and
I'll show you what I mean here in just a
moment
um and we would have a gain if the
amount of cash exceeds the current Book
value so how do we know what the current
Book value is well we take the 79.7
and we subtract from it all of the acute
depreciation
and so our book value was 24 740 We
compare the book value to the amount of
cash received the cash is less so that
tells us that we're going to have a loss
now we already know that because it's
right there we can also do this a
different way and subtract the cash
proceeds out and it's going to give us
the same 10 740 there so we could have
done this as a plug
um but if we you know that would do
using as a plug would get this 10 740
here but if we don't know the rule uh
that we have to subtract the accumulated
depreciation taken from the historical
cost to the asset we won't be able to
compare Book value to the cash proceeds
and we might label this
um we might label this again incorrectly
right especially if we don't know that
gains have a normal credit balance and
losses have a normal debit balance if we
know all that well we could have saved
some time we could stop talking a couple
of minutes ago anyway that's it for this
video I hope you learned something