AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Property-Plant-Equipment: Module 9 Slide 1 Hi everyone. When we first started the discussion of property, plant, and equipment we learned that there were four accountable events that we needed to deal with. We had to record the acquisition of the asset. We had to record the depreciation of the asset. And we had to record any expenditure that occurred once the asset was in use. Now those first three accountable events we have now talked about. The last accountable event deals with selling the asset. We have to record the sale or disposal of the asset. That’s what we’re going to deal with in this module.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 Whenever you have a sale of the asset, whenever you sell a piece of property, plant, or equipment what you need to do is compare the book value of the asset at the date of sale to whatever cash was received from the sale. If the cash received exceeds the book value, if you get more cash from the sale of the asset than what the book value of the asset was, that’s when you would record a gain on the sale of the asset. If, however, the book value is the bigger number, if the cash that you’ve received from the sale is less than the book value of the asset, in that case you would record a loss on the sale of the asset.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Slide 3 Now before we jump in and do this let’s talk for a few minutes about the account’s gain and loss on sale. A gain. A gain is classified as a revenue account, meaning it is found on the income statement and because it’s a revenue account it results in an increase to net income and thus an increase to retained earnings. A loss on the other hand, is an expense account. An expense account is also found on the income statement, but it results in a decrease to net income and thus a decrease to retained earnings.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 Slide 4 Take a look at the last example, example number six from the website problems. Let’s read it together. It says Davis Motor Company purchased a new machine on January 1st of 1993 for $64,000. The machine was assigned a $4,000 residual value and a five-year life, and was being depreciated using the straight-line method. Required. Assume the machine was sold for $24,000 cash. Write the journal entry to record the sale of the machine assuming the sale happened in letter A, on December 31st of 1995, and then in letter B, on October 1st of 1996. Now here’s what we know. We know that we’re using the straight-line method to calculate depreciation on the machine. And we know that straight-line depreciation is cost minus residual value divided by life. So we can calculate the depreciation per year as 64,000 minus 4,000 divided by 5. We were depreciating $12,000 per year of this machine. We can also calculateAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 the accumulated depreciation on the machine at the date of sale starting in requirement A December 31st of 1995. That’s three years. We bought the thing on January 1st of 93. So 93, 94, 95—three years depreciated at $12,000 per year—the accumulated depreciation as of the date of sale, $36,000.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 5 Once we know that we can put together this nice easy schedule. Take the cost of the asset. We know that was $64,000, minus its accumulated depreciation. We just calculated that. It’s 36,000. And we know that cost minus the accumulated is the asset’s book value, in this case 28,000. We compare the book value to the selling price. How much did we get from the sale of the asset? The problem told us—24,000. Because the book value is the bigger number, because the book value is greater than the cash received from the sale, we are going to report a $4,000 loss on the sale. Now before we can jump in and do the entry let’s list out the things that need to be dealt with, things that need to be accounted for. One, of course, you have to record the cash that you received from the sale. Two, you sold the asset; you no longer own the asset. You have to eliminate the asset. It has to be removed from your balance sheet at the same amount it is reported on the balance sheet at--its capitalized cost. So remove the asset from theAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 balance sheet at its cost. You also have to remove any accumulated depreciation related to the asset from your balance sheet. You don’t have the asset anymore. It’s been sold. We sold it. We took the asset off the books. We also have to remove any accumulated depreciation that was related to that asset from the balance sheet. And then the fourth thing is we have to record the gain or the loss on the sale of the asset.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 Slide 6 Okay now that we know what needs to be recorded whenever there’s a sale of P, P, and E, let’s see if we can take the information from our schedule and put it into a journal entry. The very first thing that has to be recorded is record the cash that was received. And we received $24,000 of cash from the sale of this machine. So we’ll debit cash for 24,000. The second thing that we had to record, we had to eliminate—we had to get rid of—the asset from our balance sheet. We don’t own the machine anymore. And we have to remove the asset from the balance sheet at its original cost. So we will credit the asset. We will credit machinery to take it away, to get it off the balance sheet at its cost of $64,000. We also have to eliminate the contra asset. We have to remove any accumulated depreciation that was related to the asset that was sold. So we will debit our accumulated depreciation. We’re eliminating a contra asset. The normal balance for a contra asset is on the credit side. So to remove it orAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 9 take it away will debit the account. We’ll debit our accumulated depreciation, $36,000. And the last thing we have to record was the gain or the loss, and we know here in part A there was a $4,000 loss on the sale, so we can