College Of Administration And Finance Sciences Assignment 3

College Of Administration And Finance Sciencesassignment 3deadline

Describe the methods that companies can implement to depreciate plant assets.

On June 1, 2020, ABC Company signed a $25,000, 120-day, 6% note payable to cover a past due account payable.

a. What is the total amount of interest to be paid on this note?

b. Prepare ABC Company's general journal entry to record the issuance of the note payable.

c. Prepare ABC Company's general journal entry to record the payment of the note on September 29.

What are the differences between sole proprietorship and corporation?

Paper For Above instruction

Introduction

Understanding how companies depreciate plant assets and manage notes payable is essential for grasping fundamental accounting principles. Additionally, recognizing the differences between sole proprietorships and corporations provides insight into business structures, liabilities, and operational complexities. This paper explores methods of depreciation, calculates interest on a note payable, and contrasts two primary business forms.

Methods of Depreciating Plant Assets

Companies adopt various methods to allocate the cost of plant assets over their useful lives, reflecting the asset's consumption and maintaining accurate financial records. The primary depreciation methods include the straight-line method, declining balance method, and units of production method.

The straight-line method distributes the cost evenly over the asset's useful lifespan. It is the simplest approach, calculated as (Cost - Salvage Value) divided by useful life in years. For example, if a machine costs $50,000 with a salvage value of $5,000 and a useful life of 10 years, annual depreciation expense would be: ($50,000 - $5,000) / 10 = $4,500.

The declining balance method accelerates depreciation, allocating higher expenses in early years. The most common variant is the double declining balance method, which uses twice the straight-line rate multiplied by the book value at the beginning of each period. This approach is suitable for assets that rapidly lose value or become obsolete quickly.

The units of production method bases depreciation on actual usage or output, making it ideal for machinery where wear and tear correlate with activity levels. The expense per unit is calculated as (Cost - Salvage Value) divided by total estimated units, then multiplied by units produced during the period.

Implementation of these methods depends on the company's accounting policies and the nature of the assets. Proper depreciation ensures accurate profit measurement and asset valuation, complying with accounting standards like GAAP or IFRS.

Interest Calculation and Journal Entries for ABC Company

Given ABC Company's note payable of $25,000 issued on June 1, 2020, with a 120-day term at 6% annual interest, we proceed to calculate total interest and record journal entries.

First, determine the interest: Interest = Principal × Rate × Time.

Since the interest rate is annual, we adjust for the actual period (120 days):

Interest = $25,000 × 6% × (120/360) = $25,000 × 0.06 × (120/360) = $25,000 × 0.06 × 0.3333 = $500.

Thus, the total interest to be paid is $500.

a. Total interest to be paid: $500.

b. Journal entry to record issuance of the note payable on June 1, 2020:

Dr. Cash ........................................ $25,000


Cr. Notes Payable ....................... $25,000

This records the receipt of cash and the obligation to pay the note.

c. Journal entry to record payment on September 29, 2020:

Dr. Notes Payable .......................... $25,000


Dr. Interest Expense ..................... $500


Cr. Cash ........................................ $25,500

This entry reflects the repayment of the principal along with interest accrued over 120 days.

Note: The payment date September 29, 2020, coincides with the note expiration after 120 days from June 1, 2020, assuming no leap year adjustments.

Differences Between Sole Proprietorship and Corporation

Sole proprietorships and corporations are the two primary forms of business organization, each with distinct characteristics. A sole proprietorship is owned and operated by a single individual, who bears unlimited liability, meaning personal assets are at risk if the business incurs debts. It is simple to establish, with minimal legal formalities, and profits are taxed as personal income of the owner (Brealey, Myers & Allen, 2020).

In contrast, a corporation is a separate legal entity owned by shareholders. It offers limited liability, protecting owners' personal assets from business liabilities. Corporations can raise capital more easily through the issuance of stock, and they enjoy perpetual existence independent of ownership changes. However, they entail more complex legal requirements, higher formation costs, and are subject to double taxation—profits taxed at the corporate level and dividends taxed at the shareholder level (Eggert, 2021).

The decision to choose between these two depends on factors like business size, need for capital, liability considerations, taxation preferences, and operational complexity (Miller & Jentz, 2022). Sole proprietorships provide simplicity and direct control, suitable for small ventures, whereas corporations are advantageous for larger enterprises seeking growth and limited liability.

Conclusion

Depreciation methods such as straight-line, declining balance, and units of production are crucial for accurately reflecting asset value and expense recognition. Proper interest calculations on notes payable ensure correct financial reporting, while understanding the structural differences between sole proprietorships and corporations informs strategic business decisions. Each aspect plays a vital role in effective financial management and compliance with accounting standards.

References

  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill.
  • Eggert, R. (2021). Business Structures and Legal Implications. Journal of Business Law, 45(2), 134-150.
  • Miller, R. L., & Jentz, G. A. (2022). Fundamentals of Business Law and Finance. Cengage Learning.
  • Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
  • Brigham, E. F., & Houston, J. F. (2020). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • Johnson, H. T., & Greening, D. (2020). Finance and Accounting for Business. Pearson.
  • FASB. (2022). Accounting Standards Codification (ASC). Financial Accounting Standards Board.
  • IFRS Foundation. (2022). International Financial Reporting Standards. IFRS Standards.

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