So what is the amount of the depreciation associated with this truck?

So if you just go back to previous question,

what do we know about this truck?

We purchased this truck for $40,000, it has a salvage value of $4,000 and

then it has a useful life of ten years.

Therefore the annual amount of depreciation is 40,000 minus salvage value

of 4,000 divided by 10, so amount of depreciation expense per year is 3,600.

Therefore, we create a depreciation expense of 3,600.

It is going to be debited.

What is the other side of this transaction?

We create especially again another contrasted account called accumulated

depreciation, a 3,600.

Notice that it is credited.

It's a contra asset account.

It is used to record depreciation expenses of our machinery,

the truck or any PP and E so far.

So far means in this question we have just one year of usage,

therefore accumulated depreciation for one year is 3,600.

If we record the two years of accumulated depreciation, it's going to be 7,200.

And if you look at the ledger accounts, depreciation expense is 3,600 debit and

accumulated depreciation is a contra asset account,

therefore it has a credit balance of 3,600.

Here is an interesting example.

Illini Toy Shop sells the truck for

$15,000 after five years of usage on January 1st, 2015.

Yes, we thought originally the truck will have ten years of life, but

after five years, for some reason, I want to sell this truck.

How are we going to do the journal entry?

The main principle here is that when you're selling this truck,

you need to get rid of any accounts associated with this truck.

So let's go step by step.

First of all, there is a debit to cash of $15,000.

You are selling this truck for $15,000, therefore cash goes up at 15.

So there is no problem.

Second, you're sending this truck, therefore the PP and

E account of 40,000 needs to be removed from your books.

If you look at the last line in this journal entry, PP and E account,

40,000 credit.

I don't have this PPE.

I don't have this truck anymore.

The second part associated with this truck is that if I look at my books,

there will be an accumulated depreciation associated with this truck because of five

years of usage.

If we go back to previous question,

we know that every year depreciation expense is 3,600.

For five years, the depreciation expense will be 18,000.

We know that accumulated depreciation is normally a contrasted account.

It has a credit balance.

To get rid of this accumulated depreciation,

you gotta debit it as 18,000.

Okay, so let's just step back and think.

What do we have so far?

So far we have a credit of 40,000, we have a debit of 15,000,

we have a debit of 18,000.

In total we have a debit of 33,000.

So debit 33, credit 40, it doesn't balance.

So what should be the balancing entry?

It's going to be loss on disposal.

Basically because of this sale, we have a loss of $7,000.

Since this is a loss, this is an expense account,

it is going to be debited as $7,000.

And if you look at the ledger account, cash goes up by 15,000,

accumulated depreciation goes down or removed by $18,000.

We created loss account as an expense account by 7,000.

And finally, our PPE is removed by $40,000.

In our example number 14, the value of a truck originally purchased for

50,000 with a current accumulated depreciation of

10,000 decreases to 25,000 on January 1st, 2017.

We have a truck.

It's valued original purchase price is 50,000.

It's current amount of accumulated depreciation is 10,000.

For some reason today, we understand that it's value decreases to 25,000.

So since we are in accounting, we're conservative,

we need to do something about this loss of value.

How are we going to do the accounting for this one?

But first of all, let's start with the last line.

The size of the PP and E is reduced to $25,000.

If I look at before this transaction, there is a debit of $50,000.

But I know that the value of this truck needs to be $25,000.

Therefore, 25,000 is removed from PP and E account, that's step number one.

Step number two, I close accumulated depreciation associated with this truck.

Therefore, if you notice the first line in this journal entry,

accumulated depreciation is debited by 10,000.

I don't have any more accumulated depreciation associated with this account.

Okay, what do we have so far?

There is a debit of $10,000.

There is a credit of 25,000.

Again, it doesn't balance.

The balancing entry will be called as PP and E impairment loss.

This asset is impaired, its value is lost.

Therefore, there will be an impairment loss of 15,000.

So if you look at the ledger accounts,

accumulated depreciation account is closed associated with this truck.

There is an impairment loss of $15,000, therefore it is debited.

It is on the left hand side.

And finally, the amount of PP and E is adjusted $25,000.

How am I going to do this?

Originally it was 50, I deduct $25,000 by crediting PP and E account by 25,000,

therefore the net amount will be now again another $25,000.

This concludes our discussion in module number 2.

In this module we learned how to journalize asset related financial

transactions and how to post the journal entries on the ledger.

In the next module, we will go through examples, which will require journalizing

and posting transactions about liabilities and shareholders' equity.

Until that time, take care.

[SOUND]