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Hello we are having a good discussion here um lets continue it in regards to accounting
okay last class period I think we wrapped up some chapter ten subjects in regards to
fixed assets didn't we and I think I have three or four uh exercises for us that I assigned
as homework we are going to go over those and then we are going to start chapter our
last chapter in this class um chapter eleven in regards to current liabilities and that's
actually a pretty quick and easy chapter okay so we are going to definitely get to the end
of it lets go to uh the homework that I assigned and I believe the homework that I assigned
and I believe the first one I assigned was quick study ten eleven okay that one was a
pretty easy one wasn't it okay quick study ten eleven says which of the following assets
is reported on the balance sheet as intangible assets and which are reported as natural resources
okay alright I'll say these I'll go through these and you tell me the answer timberland
is a natural resource it's like forestry or whatever a patent is what? Tangible assets
a lease hold is what? Also an intangible asset oil well, natural resource natural resources
have to be earth and stuff like that equipment that's a trick question it's not an intangible
it's not a natural resource that's just a regular plant asset okay I know they didn't
even offer that as an option so they are kind of reaching your copyright is what an intangible
a franchise an intangible and a gold mine would be natural resource that was easy don't
you hope that's w\how the whole final is? Um okay any questions on that? Alright let's
go over to exercise ten sixteen alright exercise ten sixteen and this one has to do with the
disposal of assets correct? Alright millworks company owns a milling machine that costs
one hundred and twenty five thousand in accumulated depreciation and has accumulated depreciation
of ninety one thousand prepare the entry to record the disposal of the milling machine
on January fifth on each of the following independent assumptions okay well remember
the five steps disposing of an asset what was the first o9ne it was update depreciation
to the day of disposal correct? Well we are assuming here that they did depreciation in
December thirty first okay um so we don't really have to update depreciation because
we have only had it there is only five days we have had it that hasn't been depreciated
so we do not have to depreciate for such a small period of time in other words that first
step updating depreciation to the date of disposal its already done okay so we can move
on to the second third fourth and fifth steps which is basically building that journal entry
we removed the asset from the books we removed the accumulated depreciation from the books
we record any cash given or received if there was any and then the last thing we do is say
there is this journal entry balance and if it doesn't then we either enter a loss on
disposal if we need help on the debit side or a gain on disposal if we need help on the
credit side and remember about gains and losses I know I've said this but im going to repeat
it again a loss is k9ind of like an expense it has a debit balance it's on the income
statement its deducted and derived from that income it's a temporary account that is closed
at the end of the period a gain is kind of like an revenue account it has a credit balance
its added in arriving at our net income and it's a temporary account as well okay so let's
take a look at this alright okay the first situation was the machine needed extensive
repairs and it was not worth repairing millworks disposed of the machine and they received
nothing in return okay so they just they just threw it out okay now one thing that they
did in the solution manual that you really almost didn't need to do was they did go ahead
and figure out what is the book value of the milling machine okay and now remember book
value is cost minus accumulated depreciation so the cost in one twenty five the accumulated
depreciation is ninety one the book value is ninety four now the book takes more of
a stance of comparing more of the book value of the asset to whatever we received and um
figuring out if there is a gain or loss that way I take more of an approach of just build
the journal entry knowing a journal entry has to balance the total debits have to equal
the total credits but either way this is what you get as your journal entry alright did
you guys get that? Okay what about the next scenario? The next scenario says we sold the
machine for seventeen thousand five hundred dollars cash well we remove the asset we remove
the accumulated depreciation from the books now we have to record the cash that we got
seventeen thousand five hundred and then to balance this journal entry we had to debit
loss on sale of milling machine for sixteen thousand five hundred cool? Alright Disposal
or is it - yeah, yeah you can just write loss on disposal okay the third scenario is uh
we sold the machine for thirty five thousand dollars cash which is exactly the book value
which I'm going to guess means that we didn't have to record a gain or a loss because the
journal entry balanced on its own. Is that correct? Alright the fourth scenario we sold
it for forty thousand dollars cash okay and there is our scenario there. There to balance
the journal entry we needed help on the credit side correct? So we credit just like revenue
we credited gain of sale on milling machine or just gain on disposal gain of something
okay and there are our journal entries any questions on those? I find it easier just
to build the journal entry like I said so hopefully that worked well for you I always
figured we have to make the journal entry anyway so might as well just do that and let
that answer questions that we need to answer okay alright uh exercise ten nineteen is that
correct? Let's go through that exercise ten nineteen bush gallery purchases the copyright
on an oil painting for two hundred and thirty six thousand seven hundred on January one
2011 it must be a really nice painting uh the copyright legally protects its owners
for twelve more years the company plans though to market and sell prints for fifteen years
prepare entries to record the purchase of the copyright on January one 2011 and its
annual amortization alright let's do that. Um okay first of all lets record what the
when we purchased the copyright what that journal entry is going to look like okay and
that's just going to be a debit to copyright which is an intangible asset long term asset
and a credit to cash for two hundred and thirty six thousand seven hundred okay now we need
to amortize this now amortizing is kind of the equivalent for depreciating or depleting
remember we depreciate plant assets uh we deplete natural resources and for tangible
assets we amortize okay so do we amortize this thing over twelve years or fifteen years
because it gives us two time periods you always do the one that's left okay so twelve is left
alright so what that journal entry looks like is this there is no salvage value that is
given so we have to assume zero two hundred and thirty six thousand seven hundred minus
zero divided by twelve years equals nineteen thousand seven hundred and twenty five now
we debit amortization expense okay amortization expense and we credit accumulated amortization
I don't want to see the words depreciation or depreciate okay and of course accumulated
amortization is a contra asset just like depletion and accumulated depreciation okay, okey doke
one last one and then we are done with chapter ten alright and I believe chapter or I believe
this last tone is over asset turnover is it not? Okay uh exercise ten twenty two joy company
represents or reports net sales of four million eight hundred two thousand for two thousand
ten and seven million five hundred and forty thousand for 2011 end of the year balances
for total assets are two thousand nine one million five hundred and eighty six thousand
two thousand ten one point seven million and two thousand eleven one million eight hundred
and eighty two thousand compute their total asset turnover for two thousand ten and two
thousand eleven and then comment on joys efficiency in us9ing its assets of the competitors use
an average of total asset turnover of three point zero okay alright well let's do that
lets go ahead first and just look at the computations now the formula for total asset turnover is
our net sales divided by our average assets correct so for 201 we are going to take net
sales of four million eight hundred sixty two thousand divided by the total of assets
at the beginning of that year plus the end of the year divided by two just figure in
the average there and divide it by the denominator okay so we get two point nine six don't round
that I like to keep those to two decimal places okay and for 2011 same rationale we get a
total asset turnover of four point two did you guys get that? Any questions on how those
numbers were derived? Alright cool alright okay um now let's comment on it well are things
getting better or are things getting worse? Yeah well you always want to know is it like
golf do you want a low score or is it like bowling you want a high score with these ratios
some of them you prefer to be high sometimes you prefer them to be low this is one uh we
want it to be high we want there to be an efficient use of our assets now what are our
competitors averaging? Three point zero so it looks like we are in regards to this ratio
we are outperforming our competitors of course we have to analyze a lot of other things too
but um and you want to make sure you compare it to a competitor right? Uh you would never
want to compare the asset turnover of a law firm to the asset turnover of a steel manufacturer
right because some companies have a lot of assets and some companies don't some companies
require a lot of fixed assets to do their business and some don't right? Okay when I
was in consulting um I mean if I would have figured out my total asset turnover it would
have been astronomical because I really didn't have any assets I had a computer back then
I had a fax machine and that was about it maybe I had a couple receivables on the book
and maybe I had a little cash in the bank and that was about it but I just didn't have
a lot of assets right? Think about it think about it like being a real-estate person does
a real-estate person just somebody who sells real-estate they don't need a lot of assets
right? Okay they don't need a lot of assets to do their business um but there is other
things like a car manufacturer or um you know a steel manufacturer where you need millions
of dollars of assets and stuff okay alright cool enough about that we are done with chapter
ten right? So now let's go into with our remaining time lets go into chapter eleven okay now
chapter eleven it goes pretty quick because there is a lot of things in chapter eleven
we are going to think haven't we already talked about this and there is a lot of things yeah
we already have talked about uh in one chapter or the other so some of it may seem pretty
familiar but this chapter is on current liabilities and payroll accounts okay so let's dive into
it lets talk about what a liability is first of all a liability is you have a present obligation
because something that happened in the past and it's going to require future sacrifice
okay that's kind of a clever way of bringing all of the different time tenses in there
but it's something we owe right now because it's something that happened in the least
like a purchase or people didn't work for you and it's going to require future sacrifice
more than likely the payment of cash to the appropriate person or company okay now there
are we ned to classify our liabilities and I want you to focus on I really want you to
focus on the top half of these definitions a current liability is expected to be paid
within a year generally speaking and a long term liability is expected not to be paid
within a year okay that's pretty simple isn't it you just ask when is this due is it due
within the next twelve months if so it's a current liability if not it's a long term
liability okay they have these other exceptions in regards to the operating cycle but I don't
really want you to focus it on that so much I don't really kind of want you to think of
the one year versus the one year guide post the one year is it less than one year or is
it more than year okay um there are a lot of liabilities that are known or determinable
we know how much they are we know who we pay we know when we need to pay by they give us
examples like accounts payable which we talked about we are going to talk about sales tax
payable we have unearned revenue we are going to talk about short term notes payable and
payroll liabilities and then multi period known liabilities so those are some of the
subjects we will go through in this chapter okay what about sales tax payable okay well
you guys all understand this thing about sales tax right? Right okay my kids are learning
this my kids will save up for a computer game that's fifty dollars and they will say hey
I've got fifty dollars lets go buy that game I have saved up enough money and I'm like
have you learned about sales tax son? No what's sales well I've got some bad news for you
right? Because to buy a computer game at Walmart or BestBuy if the game is fifty dollars you
are going to have to give them more than fifty dollars right? In way does anybody here work
retail? Ever worked retail of assets before? I don't remember Jake you did? Okay you are
collecting all of these retail stores act as collection agents for the government right?
They are collecting sales tax do you get to keep that sales tax? No you have got to give
it to the government okay so let's look at an example on may fifteenth 2011 max hardware
sold building materials for seventy hundred dollars that are subject to a six percent
sales tax okay now we are going to collect more than uh seventy five hundred dollars
of cash from that customer we are going to figure out what the sales tax amount on that
is. Well six percent times seventy five hundred is four hundred dollars so they actually are
going to give us seventy nine fifty dollars. Seven thousand nine hundred and fifty dollars
right? Now seventy five hundred of that is ours to keep. But the other four fifty that's
not ours is it we are holding that for the government okay so we have to set up this
short term liability of sales tax payable to the government until we send that in or
however we omit that to the government the government is going to get very cranky if
we don't remit our sales tax. Is there an amount for how much sales tax you are supposed
to be bringing in? Or do they compare it to your sales or - uh well of course we know
our sales tax rate but you are saying do they like look at it to make sure you are not yeah
what if you gave them a different amount like what if you were keeping some of that money
or something - yeah I don't know all of the reports but I know you probably figure out
the sales you figure out what to tell them for sales were for the period and then remit
the appropriate amount and if you tried to uh if you tried to just like make cash sales
just off the record and not charge sales tax I mean you would probably get in big trouble
but that would make the government very upset when they found out you would be in very big
trouble okay um okay let's talk about unearned revenues we have spoken about this before
haven't we? Remember our old buddy the revenue recognition principal? Way back in chapter
one? Remember what that states; we recognize revenue when it is earned when it is earned?
When we have provided the product or service and not until then it doesn't matter when
we receive the cash correct? Its whe we provided the product of the service so example on may
one of 2011 A1 catering received three thousand dollars in advance for catering a wedding
party that will take place on July twelfth of 2011 now on may the first we receive that
money but we cannot recognize that as revenue can we? We have to book that as unearned revenue
and do you remember what type of account is unearned revenue? It's a liability right?
How do we earn that how do we decrease that liability by providing that service of catering
on July twelfth okay so when we do that that's when we can reduce that liability by debiting
it so unearned revenue is debited and we could book it as revenue okay we have to recognize
the revenue let go back in time a little bit what if they pay us the money we recognize
it as unearned revenue and then what happens if that wedding is called off well it depends
on what our return policy is but if you don't have one you have got to give them that money
back right? Correct you haven't earned it yet. Okay but its assume that they have the
wedding it's a wonderful gala and they are happily married for many many years we recognize
that revenue when it is earned and its earned when we have provided the catering services
alright okey doke questions on unearned revenue alright lets I'm kind of yacking a lot up
here so I don't like to lecture too much because I'm afraid people will fall asleep um so let's
go ahead and just do a few quick studies um lets go ahead and do quick study eleven point
two and quick study point three I don't believe those will take too long. So let's go ahead
and do quick study eleven two and quick study eleven three. Alright lets go over those I
don't think those are too difficult. Quick study eleven point two uh record computing
that's and unfortunate name, record computing sells merchandise for five thousand cash on
September thirtieth the cost of the merchandise is twenty nine hundred dollars the sales tax
law requires record to collect four percent sales tax on every dollar merchandise sold
record the entry for the five thousand dollar sale and its applicable sales tax also record
the entry that record the omittance of the four percent tax on the sale to the state
government on October the fifteenth okay alright well when we sell that merchandise we actually
have two journal entries that we need to make okay you might have forgotten the second one
to record the cost of inventory sold but uh focusing on that top journal entry our sales
were for five thousand dollars right? What's four percent of five thousand its two hundred
so we are going to collect fifty two hundred dollars total from that customer two hundred
of that is not ours though we are acting as a collection agent for the government so we
have to set that up as a sales tax payable to the government right? Okay and then of
course we need to decrease our merchandise and book our cost of goods sold all lock chapter
fifteen now when we pay the government on October the fifteen that it's just like the
reduction of any other liability okay when we - did I say something wrong? Oh sorry thank
you remind me when I say stupid things like that okay grandpa is getting old okay when
we pay the government on October the fifteenth we we record it just like the payment of any
other liability right? Cash is credited and the liability is debited or reduced right?
That's not too difficult is it? Questions on quick study eleven two? Okay um lets go
to quick study eleven three tickets Inc. received a five point five million dollar cash advance
ticket sales for a forward date tour of Bruce Springsteen. Record the advance ticket sales
on October the thirty first let's do that first okay ticket Inc. gets this money five
point five million dollars' worth and they have to book this as unearned revenue you
could have just said unearned revenue but they have titled unearned ticket revenue and
why is this unearned we haven't provided the service of the Bruce Springsteen concert yet
okay alright so this is a big old liability account is it not? Okay and um lets go on
then so that's what we do on that date record the revenue earned for the first concert of
November eights assuming it represents one fourth of the advance ticket sales okay so
that one fourth of the services right? So what's one fourth of five point five million
its one point three seven five million isn't it? So after they do that first concert we
can decrease unearned ticket revenue liability by debiting it and we can book it as revenue
earned ticket revenue or you might have just said revenue or earned revenue or something
okay so that's how that goes any questions this all seems like review doesn't it okay
I believe we have got a little bit of time lets so let's go ahead and talk about the
exit subject which is short term notes payable now some of this may seem really familiar
because we just talked about notes receivable right? And this is just kind of the same rationale
it's just on the other side of it what's a short term note payable it's a written promise
to pay a specified amount of a definite future date and if it's a short term note payable
then it's in a year pretty much okay now let's look at an example now this is a situation
where our company owes five thousand dollars on accounts payable and for whatever reason
maybe we are having cash troubles or the economy is bad or all of the above we can't pay that
five thousand dollars account payable so we are going to replace that account payable
with a note payable it's going to give us a little more time to get our money together
it's going to charge interest and you know a note payable is something that's signed
as well right so it's going to give the person that's owed the money a little bit more piece
of mind remember the difference between an accounts payable and a note payable is a note
payable is written down and there is usually interest involved right? So on august first
2011 matrix Inc. asked Carter company to accept a ninety day twelve cent note to replace our
existing five thousand dollar account payable to them so we would make the following entry
we would decrease or debit the accounts payable we had to them and set it up as a note payable
are you with me? Alright and then we pay the note on October thirtieth plus interest to
Carter now let's go back one slide we are not just going to give them five thousand
dollars are we? We have got to give them the five thousand dollars principal plus the applicable
interest do you remember how we computed interest? Interest is computed by taking the principal
of the loan of five thousand times the annual interest rate of twelve percent times ninety
divided by three sixty because this is a ninety day note and you could do three sixty five,
ninety divided by three sixty five if you I mean I recognize there are three hundred
sixty five days in a year but we use usually do three sixty because its easier math alright
so we have to give them not just five thousand but fifty one fifty and we reduce the note
payable by the principal amount and then we book the other one fifty as interest expense
do you remember doing this okay questions on that slide? This is kind of what a note
looks like okay have you looked at that before we looked at the face value the person owes
the money signs it and states what the interest rate is etc. let's look at another example
now this is another situation of a note payable but instead of replacing accounts payable
this is where we just like get a short term loan so on September first 2011 Jackson Smith
borrows twenty thousand from an American bank the note bears interest at six percent annually
per year and they are due in ninety day so this is a short term notes payable so here
we get a little loan right so we debit cash for twenty thousand and we credit our note
payable for twenty thousand are you with me? Okay now when we pay that back once again
we have to pay the principal amount of twenty thousand but we also have to figure out the
amount of 9interest we have to pay alright. And In this case its three hundred dollars
the twenty thousand in the note times the annual interest rate of six percent times
ninety divided by three sixty because this is a ninety day note okay alright what about
you end of period adjustments to notes? Okay well remember if you originate a note on a
certain day and the maturity date well let me say this a little different if you have
an end of the period and you are going to do financial statements as of that date and
this is between when the note originated versus when it matures then you have to record an
adjusting journal entry to record the interest expense that's has occurred to that date remember
doing this and this is between when the note originated and when it matures then you have
to record an adjusting journal entry to record the interest expense that has incurred to
that date remember doing this with a notes receivable okay for example we say on December
sixteenth 2011 we signed or we borrowed eight thousand dollar by signing a twelve day sixty
percent note payable. Now this note is not due until February fourteenth now we do our
financial statements as of December thirty first two thousand eleven so we have to record
an end of the period AJE to show that interest that is due we don't have to pay it that day
but we do have to pay a liability that day and we have to book that expense in a proper
period okay so how would we do that? Well how many day have gone by? Fifteen days between
those so we have to make the following adjusting journal entry well okay first of all they
show us the journal entry when the note is created okay but then on December thirty firs
the adjustment this is the adjusting journal entry down here we have to take eight thousand
which is the base amount of the note times the twelve percent of the interest rate times
fifteen times three sixty and we counted out that fifteen on the previous slide right fifteen
days between December sixteenth and December thirty first we don't have to like I said
there is no cash outlay that day but we have to book the interest expense and then book
the interest payable are you with me? Okay then when we actually pay off this note we
make the following entry okay. Um now I do this a little different but let's show what
it is okay I like to figure out what is the total amount of interest that we have to pay
okay so in this case this was a sixty day note right? If I figured out the total amount
of interest that has to be paid I would take eight thousand times twelve percent times
sixty divided by three sixty and I would get a hundred and sixty dollars are you with me?
So then what I would say is okay I have to give them cash of eight thousand dollars for
the principal and I have to give them one hundred and sixty dollars of interest that's
the total amount of interest and the next thing I would do is I would reduce my note
payable by the principal amount and then I would ask myself this of that hundred and
sixty dollars total interest how much of that has not yet been recorded as interest expense
but needs to be? Well one hundred twenty dollars of it right? Because we recognized forty dollars
with the AJE so then I would book this part of the entry and then I would say okay this
journal entry needs to balance and that has to be to reduce the um the interest payable
that we set up with the AJE so you can approach that journal entry different ways they approach
it by focusing on that forty five days between the financial statement date and the payment
date but I like to kind of ask myself okay what's the total amount of cash I have to
give them principal plus the total interest. Whichever way works easier for you okay um
and there we shall stop okay so let me go ahead and give you your homework uh let me
write it down and I'll put it on the overhead. Alright pretty easy assignment. Pretty short
and easy okay okay here we go for homework I want you to do one quick study and one exercise
okay that's all you have to do and we shall see you next time folks bye bye.