Q1: Describe The Methods Companies Can Use On Their Own

Q1 On Your Own Words Describe The Methods That Companies Can Impleme

Q1 - On your own words, describe the methods that companies can implement to depreciate plant assets. (2 Marks). Q2 - 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, marks). Q3 . What are the differences between sole proprietorship and corporation? (1 mark).

Paper For Above instruction

Depreciation is a systematic method of allocating the cost of a tangible asset over its useful life. Companies can implement various methods to depreciate plant assets, primarily including straight-line depreciation, declining balance depreciation, and units of production depreciation. These methods help accurately reflect the asset’s expense over time and align the expense recognition with the asset’s usage and economic benefits.

Methods of Depreciation

1. Straight-Line Depreciation: This is the simplest and most commonly used method. It involves allocating an equal amount of depreciation expense each year over the asset’s estimated useful life. The calculation is straightforward: subtract the salvage value from the cost of the asset and divide by the useful life in years. For example, if a company purchases machinery for $100,000 with a salvage value of $10,000 and a useful life of 10 years, the annual depreciation expense would be ($100,000 - $10,000) / 10 = $9,000.

2. Declining Balance Method: This is an accelerated depreciation method where a larger depreciation expense is recognized in the earlier years of the asset’s useful life. It applies a fixed depreciation rate to the book value of the asset at the beginning of each period. For example, using double declining balance depreciation involves doubling the straight-line rate and applying it to the declining book value. This method reflects the higher utility or efficiency of assets in their initial years.

3. Units of Production Method: This method is based on the actual usage or output of the asset. Depreciation expense is calculated by multiplying the number of units produced or hours used during a period by the depreciation rate per unit or hour. It is ideal for manufacturing equipment where wear and tear depend on usage rather than time.

Interest Calculation for the Note Payable

Considering the example of ABC Company, the interest on the note payable can be calculated using the formula: Interest = Principal × Rate × Time. The principal is $25,000, the annual interest rate is 6%, and the time period is 120 days. Converting days into years: 120/365 ≈ 0.328. Thus, interest = $25,000 × 0.06 × 0.328 ≈ $492. Using this, the total interest payable on the note amounts to approximately $492.

Journal Entries for the Note Payable

a. To record the issuance of the note:

Date: June 1, 2020


Debit: Cash $25,000


Credit: Notes Payable $25,000

This entry recognizes the receipt of cash and the liability incurred through the note.

b. To record the payment of the note on September 29:

Given the note was issued on June 1, 2020, and matures after 120 days, the payment date corresponds to its maturity date. The total amount payable includes the principal and interest, which sums up to $25,000 + $492 = $25,492.

Date: September 29, 2020


Debit: Notes Payable $25,000


Debit: Interest Expense $492


Credit: Cash $25,492

Differences between Sole Proprietorship and Corporation

A sole proprietorship is a business owned and operated by a single individual. It is the simplest form of business structure, offering full control to the owner but also bearing unlimited liability, meaning the owner’s personal assets are at risk if the business incurs debts or legal issues.

In contrast, a corporation is a separate legal entity owned by shareholders. It provides limited liability to its owners, protecting their personal assets from business debts. Corporations can raise capital more easily through the issuance of stock and often have perpetual existence, unlike sole proprietorships, which may cease upon the owner’s death or decision to close the business.

In terms of taxation, sole proprietorship income is taxed directly to the owner, while corporations are taxed separately from their owners, although they may face double taxation unless organized as an S corporation. The choice between these structures depends on factors such as the desired level of liability protection, taxation preferences, and business growth ambitions.

References

  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2019). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (16th ed.). Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2022). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill.
  • Clarkson, P. (2017). Business Law (4th ed.). Cengage Learning.
  • U.S. Small Business Administration. (2023). Different Types of Business Structures. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
  • accountingcoach.com. (2023). Simple Explanation of Depreciation Methods. https://www.accountingcoach.com/depreciation/explanation
  • Investopedia. (2023). Depreciation Methods. https://www.investopedia.com/terms/d/depreciation.asp

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