Accounting ch10-12

Declining Balance

produces a decreasing annual depreciation over the asset's useful life

"Materiality"

**The "materiality" of the amount of a cost can determine whether the cost would be treated as an Expense or an Asset**

Co-ownership of property

- Each partner has a claim on ownership of assets equal to the balance in his or her respective capital account

Annual Rate of depreciation (Straight line)

-Annual RATE of depreciation = the portion (rate) of depreciation per year. -In the above example, the useful life is 5 years so that means 20% of the depreciation is expensed per year. -If the useful life was 10 years then the RATE would be 10% per year. -If the useful life was 3 years then the RATE would be 33% per year.

Natural Resources

-Natural resources such as timber, underground deposits of oil, gas and minerals have LONG productive lives. They are physically extracted in operations such as mining, cutting or pumping AND the are replaceable only by an act of nature. -Natural resources are assets that are depreciated but this process of cost allocation when referring to a natural resource is called DEPLETION. -Same concepts as Depreciation in that natural resources have costs, lives, and salvage values.

Cost of Land includes

1. Cash purchase price 2. Closing costs such as title and attorney's fees 3. Real Estate broker's commissions 4. Any accrued property taxes and other leins assumed by purchaser 5. Cost incurred to get the land ready for use a. Clearing, draining, filling, and grading b. Demolition and removal costs of old buildings, trash etc. 6. Less any proceeds from salvaged materials

Three Factors of DETERMINING DEPRECIATION

1. Cost 2. Useful Life = estimate of the expected productive life of an asset 3. Salvage Value = estimate of the asset's value at the end of its useful life

INCOME/LOSS DIVISION RATIOS:

1. Fixed Ratio - a fixed percentage or ratio of net income or loss that each partner will get based on agreement 2. Ratio based on Capital Balances - Net Income/Loss is distributed based on the percentage of each partner's capital account to total capital EX: At the end of the period, the Net Income of the Partnership is $50,000. The Partnership Agreement states that the net income or loss will be divided based on the Capital Balance Ratio. Glen Jones' Capital balance is $23,000 and Mike Davis' Capital balance is $65,000. Glen Jones Capital balance is 26% of the total Capital and Mike Davis Capital balance is 74% of the total capital. The Net Income of $50,000 will be closed to the capital accounts based on this ratio. The journal entry will be: INCOME SUMMARY $50,000 G. JONES, CAPITAL $13,000 M. DAVIS, CAPITAL $37,000

Intangible Assets

1. No physical substance 2. Right, privileges, & competitive advantage that result from ownership EX: grants, patents, copyrights, licenses, trademarks, trade names, and goodwill Intangible assets are assets that are depreciated but this process of cost allocation when referring to an intangible asset is called AMORTIZATION. Same concepts as Depreciation in that Intangible assets have costs, lives, and salvage values READ the sections regarding ALL the types of Intangible Assets and the AMORTIZATION process. **Some Intangible Assets have LIMITED lives and should be Amortized. **Some Intangible Assets have UNLIMITED lives and should NOT be Amortized.

Ordinary Repairs

1. ORDINARY REPAIRS = expenditures to MAINTAIN the operating efficiency and productive life of the asset A. Occur frequently B. Are small in amount C. Charged as an Expense EX: tune ups on vehicles, oil changes, replacing moving parts, re-painting of buildings, etc.

EXPENDITURES DURING USEFUL LIFE

1. Ordinary Repairs 2. Additions and Imrpovements

Three Methods of Disposal (MOD)

1. Sale 2. Retirement 3. Exchange

3 DEPRECIATION METHODS:

1. Straight-Line 2. Units-of-Activity 3. Declining Balance

Determining the Payroll

1.) Gross Earnings - total compensation earned by an employee a. ) consists of wages or salaries, plus any bonus and/or commissions 2.) Payroll Deductions - any amount deducted from an employee's gross earnings to arrive at net pay a. ) Mandatory Deductions - required by law to be deducted such as FICA and Income Taxes b. ) Voluntary Deductions - deductions from gross pay at the employee's request EX: Charitable contributions, Insurance premiums, retirement contributions 1.) Must be authorized in writing from the employee 3.) Net Pay - actual amount of the employee paycheck after all deductions

ADDITIONS AND IMPROVEMENTS

2. ADDITIONS AND IMPROVEMENTS = costs incurred to INCREASE the operating efficiency, productive capacity, or useful life of a plant asset A. Occur infrequently B. Are material in amount C. Added to the plant asset account (debit) EX: Additions to a building, etc.

Current Liability

A debt that a company expects to pay in full within ONE year or ONE operating cycle (whichever is longer) A. Notes Payable (current portion only - portion to be paid within the next 12 months) B. Accounts Payable C. Unearned Revenues D. Taxes Payable E. Salaries & WagesPayable F. Interest Payable etc.

DETERMINING THE COST OF PLANT ASSETS

A. Cost Principle = plant assets are recorded at COST B. Cost = ALL expenditures necessary to acquire the asset AND make it ready for use

Plant Assets

A. Have a physical substance B. Used in the operation of the business C. Not intended for sale to customers D. Decline in service potential for their useful lives (depreciate)

Advantages and Disadvantages of partnerships

ADVANTAGES: Combining skills and resources of two or more individuals Ease of formation Freedom from governmental regulations and restrictions Ease of decision-making DISADVANTAGES: Mutual Agency Limited life Unlimited liability

Accounts Payable

Accounts we owe money on

Partnership

An association of two or more persons to carry on as co-owners of a business for profit EX: accountants, lawyers, doctors, etc.

Equipment

Assets used in operations such as store counters, office furniture, machinery, trucks, airplanes, etc 1. Cash purchase price 2. Assembling costs, installing costs, testing costs 3. Sales taxes, costs to ship asset, insurance during transit 4. DOES NOT INCLUDE vehicle licenses or accident insurance on vehicles

CHARACTERISTICS OF PARTNERSHIPS:

Association of individuals Mutual Agency Limited Life Unlimited Liability Co-Ownership of Property

Calculating Net Pay

CALCULATING NET PAY FOR EACH EMPLOYEE: Companies do not record the expenses and liabilities associated with the payroll separately for each individual employee, but in "batches". The payroll system will usually post all the information to the general ledger itself OR produce reports that contain all the information for the accountant to make the journal entries. For Example purposes, I'm just going to record one employee's information. EX: Jane Smith worked 40 hours this week at a rate of $15 per hour. She is Married with 2 dependents. She has her weekly $10 contribution to the United Way deducted from each paycheck and pays $50 each week for her medical insurance premiums. Total accumulative gross pay so far this year is $45,500 -Gross Pay = $600.00 (40 hours X $15 per hour) -Social Sec = $37.20 6.2% on the first $110,000 earned (She has earned $45,500 so far this year) - employer must pay this same amount. -Medicare = $8.70 1.45% on all salary - employer expense must pay this same amount also! -Income Tax = $57.00 See chart p.535 - Gets Paid Weekly, She made at least $600, but not more than $610, with 2 allowances -Insurance = $50.00 -Charity = $10.00 $162.90 TOTAL DEDUCTIONS! $437.10 NET PAY This is the amount of Jane's paycheck!!! JOURNAL ENTRY TO RECORD THIS EMPLOYEE PAYROLL: Salaries & Wages Expense $600.00 FICA Payable $45.90 (Social Sec & Medicare together called FICA) Federal Income Taxes Payable $57.00 Insurance Premiums Payable $50.00 United Way Fund Payable $10.00 Salaries & Wages Payable $437.10

BOOK VALUE

COST - ACCUMULATED DEPRECIATION

Depreciable Cost

COST - SALVAGE VALUE = DEPRECIABLE COST --Asset cost less it's salvage value equals depreciable cost.

Plant Assets Disposals

Companies dispose of assets that are no longer useful to them.

Employer Payroll Tax Expense

Companies must remit to the appropriate taxing entity the payroll related taxes that have been withheld from each employee's paycheck. There are also payroll taxes that the employer must "match", such as the Social Security and Medicare taxes. The amount that the employer must match is the employer's payroll tax expense. Other taxes that are the company's payroll tax expense are State and Federal Unemployment Taxes.

Current Portion of Long Term Debt

Companies often have a portion of their long-term debt that is due in the current period. This portion that is due in the current year is called the Current Portion of Long-Term Debt and must be presented on the Balance Sheet in the Current Liabilities section. The rest of the Long-Term debt balance is presented in the Long-Term Liabilities section of the Balance Sheet. No Journal Entry is needed to adjust any account for this....it's just a matter of how the amounts are PRESENTED in the Financial Statements. EXAMPLE: On January 1, 2013 ABC Company issues a 5-year, interest-bearing note for $25,000. The terms of the note states that ABC Company must make equal payments every January 1 for the next 5 years. ABC Company prepares financial statements each December 31. On the December 31, 2013 financial statements $5,000 would be listed in the Current Liabilities section since $5,000 will be due in the next 12 months.

Depreciation Asset

Depreciable Asset = an asset that's usefulness to the company and revenue producing ability declines over time. EX: Land improvements, Buildings, Equipment, Vehicles

Annual Depreciation Expense

Depreciable Cost per Unit X # of units of activity = Annual Depreciation Expense EX: Company A purchased a delivery truck for $15,000 with a salvage value of $3,000. It has an expected useful life of 100,000 miles.

Straight Line Method

Divide Depreciable Cost by the Useful Life (in years) = Annual Depreciation Expense EX: Asset Cost = $13,000; Salvage Value = $1,000; Useful life = 5 years Step 1: Determine Depreciable Cost $13,000 - $1,000 = $12,000 Step 2: Divide Depreciable Cost by the Useful Life $12,000 / 5 years = $2,400 depreciation expense PER YEAR

Buildings

Facilities used in the company's operations such as stores, offices factories, warehouses, houses, airplane hangars, etc. 1. Cash purchase price 2. Closing costs such as title and attorney's fees 3. Real Estate broker commissions 4. Remodeling and Construction costs 5. Interest on loans received to purchase the building a. Interest during the construction period ONLY is added to cost of building b. Once the building is put IN USE, then the interest becomes an expense

Sales Tax Payable Example

For Example: On March 25 the cash register readings at Cooley Grocery Store shows sales of $10,000 and sales tax of $600 (Sales tax rate for that state is 6%) JOURNAL ENTRY: 3/25/2013 CASH $10,600 SALES REVENUE $10,000 SALES TAX PAYABLE $600 Debit to CASH for the Revenue PLUS the Sales Tax collected because the customers paid ALL the money to the grocery store and the grocery store deposited into their bank account .....hence DEBIT to CASH. The grocery store is considered a collection agent for the sales tax. It collects the tax from the customers and then pays it to the appropriate taxing authority...usually on a quarterly basis. So, on the date that Cooley Grocery store remits the sales tax to the State, the following journal entry would be recorded: 3/31/2013 SALES TAX PAYABLE $600 CASH $600 Debit to Sales Tax Payable to DECREASE the payable, since it is paid then it is no longer owed Credit to Cash because Cooley Grocery Store wrote a check (decrease Cash) to the State for the sales tax it had collected on behalf of the State.

Forming a partnership

Glen Jones and Mike Davis decide to enter into a partnership. Each contributes $50,000 cash to form the partnership. The journal entry to record the formation and contributions would be: CASH $100,000 G. JONES, CAPITAL $50,000 M. DAVIS, CAPITAL $50,000 Same partnership formed, except Glen Jones contributes $65,000 and Mike Davis contributes $80,000 CASH $145,000 G. JONES, CAPITAL $65,000 M. DAVIS, CAPITAL $80,000

Going Concern Assumption

Going Concern Assumption = the company assumes it will continue in operation

Interest Accrue (NP)

Interest accrues over the life of the loan and must be recorded at the end of each financial period. EX: Williams Company prepares financial statements annually each year on DEC 31 and must record the interest that has accrued since the date the loan was issued (SEPT 1) How to calculate interest: Principal X Rate X Time **Interest Rates are almost always given as an annual rate** So on DEC 31, Williams Company records the accrued interest $100,000 X .12 X 4/12 = $4,000 (4/12 because the loan was issued 4 out of 12 months ago...make sense?) Dr Cr 12/31/2013 INTEREST EXPENSE $4,000 INTEREST PAYABLE $4,000 **This is considered an ADJUSTING entry** Remember those? On the Maturity Date (JAN 1, 2014) Williams Company pays back the principal PLUS all the interest that is owed To record the payment of the note and accrued interest: 1/1/2014 NOTES PAYABLE $100,000 INTEREST PAYABLE $4,000 CASH $104,000 Debit to Notes Payable to DECREASE the account because it has now been paid off and the balance should =$0 Debit to Interest Payable to DECREASE the account b/c it has now been paid off and the balance should = $0 Credit to Cash for the total amount paid to bank ($100,000 principal PLUS $4,000 interest) Now....lets assume that Williams Company prepares financial statements on a MONTHLY basis.... So on SEPT 30 the company must accrue the interest.... $100,000 X .12 X 1/12 = $1,000 JOURNAL ENTRY: 9/30/2012 INTEREST EXPENSE $1,000 INTEREST PAYABLE $1,000 On OCT 31 the company must accrue another month's worth of interest..... JOURNAL ENTRY: 10/31/2013 INTEREST EXPENSE $1,000 INTEREST PAYABLE $1,000 *Bal is now $2,000 in Interest Payable Account On NOV 30 the company must accrue another month's worth of interest.... JOURNAL ENTRY: 11/30/2013 INTEREST EXPENSE $1,000 INTEREST PAYABLE $1,000 *Bal is now $3,000 in Interest Payable Account On DEC 31 the company must accrue another month's worth of interest... JOURNAL ENTRY: 12/31/2013 INTEREST EXPENSE $1,000 INTEREST PAYABLE $1,000 *Bal is now $4,000 in Interest Payable Account On JAN 1, 2014 when the note matures and payment is made to the bank, it's the same entry as before... 1/1/2014 INTEREST PAYABLE $4,000 NOTE PAYABLE $100,000 CASH $104,000

Payroll Deductions

Just like Sales Taxes Payable, all deductions are considered liabilities to the company because any amounts deducted from an employee's gross earnings are NOT the company's money. Deductions are amounts that the company must then forward to the appropriate entity: Payroll taxes deducted must be remitted to any state and local government, retirement deductions must be remitted to the company that is handling the retirment funds; insurance premiums deducted must be remitted to the insurance company; charitable deductions must be remitted to the organization. **All payroll deductions are LIABILITIES of the company**

Land

LAND does NOT decline in service potential...land Appreciates

Land Improvements

Land improvements are structural additions made to the land. 1. Driveways, parking lots, fences, landscaping and sprinklers

Materiality

Materiality - refers to the impact of an item's size (cost) on a company's financial operations EX: Company A has an annual expense for office supplies of $10,000 Company A has annual sales of $25,000,000 The $10,000 of office supplies is immaterial to sales EX: Company B also has an annual expense for office supplies of $10,000 Company B has annual sales of $150,000 The $10,000 of office supplies is very material to sales

Non-depreciable asset

NON-depreciable Asset = an assets that's usefullness to the company and revenue producing ability remains the same overtime or increases EX: LAND - Is NOT a depreciable asset

Notes Payable

Obligations in the form of written notes (promissory notes) that usually require the borrower to pay interest 1. most commonly used to meet short-term financing needs of the borrower 2. issued for varying periods of time 3. obligation (or portion thereof) that is due for payment within one year is called Current Liability 4. the amount of assets (usually Cash) that the borrower receives upon issuance of the note is called the "Face Value" (also referred to as "Principal")

Obsolescence

Obsolescence = the process of becoming out-of-date before the asset physically wears out

Unearned Revenue Examples

On August 6, 2013 State University sells 10,000 season football tickets at $50 each for it's 5 home games. JOURNAL ENTRY: 8/6/2013 8/6 CASH $500,000 UNEARNED TICKET REVENUE $500,000 As each home game is complete, State University has now "earned" the revenue and it must be recognized. After each of the five games, State University will make the following journal entry: UNEARNED TICKET REVENUE $100,000 TICKET REVENUE $100,000 Debit to Unearned Revenue to DECREASE the liability. Credit to Ticket Revenue to INCREASE the current revenue.

Limited Partnerships

One or more partners have unlimited liability and one or more has limited liability for the debts of the firm General partners - those partners which have Unlimited liability Limited partners - those partners which have LIMITED liability

DIVIDING PARTNERSHIP NET INCOME OR NET LOSS

Partners equally share partnership net income or net loss UNLESS the partnership agreement states otherwise! Do you remember the 4 Steps in the Close Process? 1. Close Expenses to Income Summary 2. Close Revenues to Income Summary 3. Close Income Summary to Capital 4. Close Drawings to Capital For partnerships, Steps 3 and 4 are different.... Step 3: Close Income Summary to Capital - with partnerships, each separate partner has his/her own Capital account **After Revenues and Expenses are closed to Income Summary the balance is either the Net Income or Net Loss So instead of closing the balance in the Income Summary to ONE Capital account, it is closed to all the partner capital accounts according to the percentages outlined in the Partnership Agreement EX: Glen Jones and Mike Davis are lawyers who have formed a partnership and share all Net Income or Net Loss equally. After Expenses and Revenues have been closed to Income Summary account, it has a Credit balance of $10,000. (Credit balance in the Income Summary Account means Net Income) The journal entry for Step 3 would be as follows: INCOME SUMMARY $10,000 G. JONES, CAPITAL $5,000 M. DAVIS, CAPITAL $5,000 EX: The same two partners as above, but according to the Partnership Agreement, Glen Jones gets 60% of the Net Income or Net Loss and Mike Davis gets 40%. The journal entry would then be: INCOME SUMMARY $10,000 G. JONES, CAPITAL $6,000 M. DAVIS, CAPITAL $4,000 For Step 4, each partner has their own Drawing Account and each partner's own draws are closed to their own capital accounts. EX: According to records, Glen Jones withdrew $1,500 from the partnership and Mike Davis withdrew $2,000 for their own personal use. The journal entry to close the Drawing to Capital would be: G. JONES, CAPITAL $1,500 M. DAVIS, CAPITAL $2,000 G. JONES, DRAWINGS $1,500 M. DAVIS, DRAWINGS $2,000 Each partner's draws are kept up with separately and are NOT divided equally or according to the Net Income/Net Loss percentages! Also, each partner COULD also be paid a Salary in addition to any draws they take out. **Salaries and Draw limitations would be stated in the Partnership Agreement**

Payroll Accounting

Payroll and related benefits often make up a large percentage of a company's current liabilities. Remember,liabilities are amounts that are owed to another entity. Payroll Accounting involves more than just paying employees' wages. Companies are required to keep records for each employee, to file and pay payroll taxes, and to comply with state and federal laws related to employee compensation.

Plant Assets Also Called

Property, Plant & Equipment (PP&E) Plant & Equipment Fixed Assets

Steps to Units of Activity

Step #1: Calculate Depreciable Cost (Cost less Salvage) $15,000 - $3,000 = $12,000 Step #2: Calculate the Depreciable Cost / Unit $12,000 divided by 100,000 = $0.12 per unit YR 1 the truck is driven 21,000 miles. YR 2 the truck is driven 18,000 miles. YR 3 the truck is drivien 22,500 miles. Depr Exp Accum Depr Book Value YR 1 2,520 (.12 x 21,000) 2,520 12,480 ($15,000-$2,520) YR 2 2,160 (.12 x 18,000) 4,680 10,320 ($15,000-$4,680) YR 3 2,700 (.12 x 22,500) 7,380 7,620 ($15,000-$7,380)

Sales Taxes Payable

Taxes that have been collected from a company's customers and then must be remitted to the appropriate taxing authority. When companies sell products to their customers, the customer must pay taxes, such as sales tax, on that product. Think about when you purchase an item at Walmart, part of the money that you pay to WalMart is the sales tax. Walmart collects the tax from you but that is NOT Walmart's money....it must remit that sales tax amount that it has collected from each sale to the appropriate taxing authority, such as the State of Texas. So the Sales Tax that Walmart collects is money that is OWED to someone else...a PAYABLE. More specifically, SALES TAX PAYABLE. Under most state laws, the company that makes the sale and collects any sales tax, must record the Sales Tax Payable separately in their financial statements.

Gross Earnings

The GROSS Earnings of each employee is the EXPENSE of the company and is recorded with a DEBIT to Salaries & Wages Expense.

ACCUMULATED DEPRECIATION

The TOTAL amount of depreciation that has been expensed (accumulated) so far.

The partnership Agreement

The agreement of two or more individuals to form a partnership expressed in a written contract Contains the names of the partners, principal location of the business, the purpose of the business, and date of inception Also specifies the relationships among the partners such as: Names and capital contributions of each partner Rights and duties of each partner Basis for sharing net income or net loss Provision for withdrawing assets Procedures for submitting disputes Procedures for withdrawing a partner or admitting a new partner Rights and duties of surviving partners upon the death of a partner

Depreciation

The process of allocating to Expense the cost of plant asset over its useful life in a systematic method. Depreciation is a process of Cost Allocation NOT a process of Cost Valuation!!!!!

To record insurance on Notes Payable

To Record the Issuance of a Note Payable: EX: On SEPT 1, 2013 Williams Company signs a $100,000, 12%, four-month note maturing on JANUARY 1, 2014 JOURNAL ENTRY TO RECORD ISSUANCE OF NOTE PAYABLE: Dr Cr 9/1/2013 CASH $100,000 NOTE PAYABLE $100,000 (to record issuance of note payable to First National Bank) **Maturity Date is the date that the principal amount (plus any interest owed) will be paid back to the lender** **Interest Rates are almost always an annual rate (12 mos.) **When the Note Payable is issued (Cash is received) on that date only the amount received is recorded. *Interest owed (Interest Payable) will be recorded at the end of each month.

Units of Activity Method

Useful Life is expressed in terms of the total units of production or expected # of units from the asset, not a time period. *Mostly used for factory machinery used in production..sometimes for vehicles expressed in "miles expected over the life of the asset". EX: a machine is expected to be used 100,000 hours over its life or a truck is expected to be driven 300,000 miles during its life Companies estimate the total units of activity for the entire useful life, and then divide these units into depreciable cost. This results in the DEPRECIABLE COST PER UNIT Depreciable Cost per Unit X # of units of activity = Annual Depreciation Expense EX: Company A purchased a delivery truck for $15,000 with a salvage value of $3,000. It has an expected useful life of 100,000 miles.

Book Value Example

Using the above example: Asset Cost = $13,000; Salvage Value = $1,000; Useful Life = 5 years Depreciation Accumulated Book Expense Depreciation Value YR 1 $2,400 $2,400 $13,000 - $2,400 = $10,600 YR 2 $2,400 $4,800 $13,000 - $4,800 = $8,200 YR 3 $2,400 $7,200 $13,000 - $7,200 = $5,800

Unearned Revenue

When a company receives payment for services not yet provided. 1. When a company receives advance payment for services that will be provided in the future, it should be recorded as a liability called Unearned Revenue. CASH XX UNEARNED REVENUE XX 2. Once the services (or whatever) have been provided then the revenue must then be recognized UNEARNED REVENUE XX REVENUE XX (For the portion that has now been earned)

Accumulate depreciation (straight line)

YR 1 Depreciation Expense = $1,000 YR 2 Depreciation Expense = $1,000 YR 3 Depreciation Expense = $1,000 At the end of YR 1, $1,000 of depreciation has accumulated At the end of YR 2, $2,000 of depreciation has accumulated At the end of YR 3, $3,000 of depreciation has accumulated

Association of individuals -

a separate legal entity from the partners Can own assets such as equipment, vehicles, and land. Accounting records are maintained separately from the partners Does not file taxes as a partnership.... Each individual partner shows their 'share' of the partnership's income on their personal tax returns

Straight-Line

companies expense the SAME amount of depreciation each accounting period

Limited Liability Partnership

designed to protect partners from malpractice or negligence resulting from the acts of other partners

Mutual Agency

each partner acts on behalf of the partnership when engaging in partnership business Any act of any partner is binding on all the other partners

Unlimited Liability

each partner is personally and individually liable for ALL partnership liabilities Creditors are first to claim against partnership assets Once all creditors are satisfied then partners divide rest according to the partnership agreement

(MOD) Retirement

equipment is scrapped or discarded. Companies retire assets when they are no longer useful to the company and they have been fully depreciated. (Fully depreciated means that depreciable cost equals book value) EX: Company A purchases a machine for $100,000. It has a useful life of 10 years and no salvage value. The company uses straight-line depreciation method. Depr Exp Accum Dep Book Value YR 1 10,000 10,000 90,000 YR 2 10,000 20,000 80,000 YR 3 10,000 30,000 70,000 xxx xxx YR 10 10,000 100,000 0 In year 15 the asset is no longer useful to the company and the company retires the asset. DR Cr Accumulated Depr - Machinery 100,000 Machinery 100,000 *No gain or loss

(MOD) Sale

equipment is sold to another party. 1. SALE - the company compares the book value of the asset with the proceeds (cash) received from the sale Gain on the Sale of Assets - proceeds exceeds book value Loss on the Sale of Assets - book value exceeds proceeds EXAMPLE JOURNAL ENTRY FOR THE SALE OF AN ASSET: Company A purchased office furniture on 1/1/10 for $50,000. It has a useful life of 10 years and $5,000 salvage value. The company uses straight-line depreciation method. Depreciable Cost = 50,000-5000 = 45,000 div by 10 years = $4,500 per year Depr Exp AD Book Value YR 1 12/31/2010 4,500 4,500 45,500 Cost - AD YR 2 12/31/2011 4,500 9,000 41,000 Cost - AD YR 3 12/31/2012 4,500 13,500 36,500 Cost - AD AD=Acum Depre On 12/31/12 Company A sells all of the office furniture to Company Z for $20,000 cash. DR CR CASH 20,000 Accumulated Depr - Office Furn 36,500 Office Furniture 50,000 Gain on the Sale of Asset 6,500 56,500 56,500 *Debit cash because we got cash! Increase with a debit *Debit Accum Depr so that it will now have $0 balance *Credit the asset account so it will have a $0 balance *Difference between Asset and proceeds plus accum depr *If this difference is a credit, then it's a Gain on Sale *if this difference is a debit, then it's a Loss on Sale EX #1: Same scenario as above except that Company A sells the office furniture to Company Z for $5,000 cash DR CR CASH 5,000 Accumulated Dept - office Furn 36,500 Officue Furniture 50,000 Gain on the Sale of Asset 8,500 50,000 50,000

(MOD) Exchange

equipment is traded for new equipment

Limited Liability Companies

hybrid form with certain features like a corporation and other features like a limited partnership

Limited Life

partnerships may be ended voluntarily through the acceptance of a new partner or involuntarily by the death of any partner EX: Jones, Smith and Barker Partnership will be dissolved if Barker dies or if they admit a new partner and becomes Jones, Smith, Barker, and Davis

Units of activity

useful life is expressed in terms of the total units-of-production or use expected from the asset