Let's now move to transactions 12 through 16, I think we'll find that these are a little more difficult. But don't worry, we'll work through these together. Let's start with transaction 12. In November the company signed a contract with a customer for $20,000 a plant to be delivered the following February. Here we record No Entry for this particular contract that's been signed. The signing of a contract itself doesn't represent the need to record any entry in the books. You might notice that this is very similar to the situation we encountered with transaction 11. In transaction 11, a customer had paid the Garden Spot $10,000 in cash for plants to be delivered the following February. There, we did record a transaction. We recorded a journal entry. The difference there and here is that in transaction 11 the customer paid cash to the garden spot which necessitated recording a transaction. And this number 12, there is no cash received. So there will be nothing recorded in the books until either the plants are delivered in February or until the customer pays cash to the Garden Spot. Let's take a look at transaction 13. In reviewing the list of customers that still owe the company money at the end year, Mary Jo decided that she didn't think that she going to $2,000 from one particular customer that was having some financial difficulty. Here Mary Jo needs to record an expense, a left hand side for retained earnings for bad debt expense or we could call it the expense of a customer not paying the Garden Spot. And reduce the accounts receivable account by making a right hand entry to that or a credit entry. Recall the matching principal tells us that we have to, when we record revenues, go search for all the cost that we incurred in generating those revenues. Companies allow customers to buy on account because it helps them to generate revenues. But unfortunately in doing so there's a cost associated with that. And that cost is that sometimes customers don't pay. So here Mary Jo must make sure that she records that it's cost as an expense at the time that she's recording the revenues in the period. Let's take a look at the transaction 14. On January 1st of this year Mary Jo sold some of the equipment that she had for $600 in cash. The equipment originally cost $1,000 when she bought it on the first day of operations in the first year. And it has a net book value of $800 at the time of the sale. Remember that we had depreciated that equipment by $200 during year one. So the first thing that Mary Jo needs to do is to take the equipment off the books. So she's going to record a right hand side to the equipment a credit for the amount that is currently sitting on the books for which is $800. She is going to record a left hand or a debit to cash to represent the cash goes up with the sale because she sold for $600 but notice that the left hand side and the right hand side are not equal. The left hand side is missing a $200,000. What is that $200? We're going to record a loss on the sale of the equipment. That's going to be a left-hand side to retained earnings. So it acts similar to an expense. So left-hand side to retained earnings, and we'll call it a loss on the sale of equipment. Let's just think about this more generally. In this particular transaction, Mary Jo sold equipment. But we can think about this as selling any asset or virtually any asset. Whenever we sell an asset, we're going to make a right hand side or a credit to the asset account to take it off the books. We're going to record a left hand side to cash, assuming that the company sold it for cash, and then we're going to record a gain or loss for the difference. So just about any asset that we sell, we can treat it that way. The only exception is inventory, and that's because we record the sale piece and the cost piece separately. Transaction 15. Mary Jo was approached by a real estate developer, was offered $120,000 for the land that she had just recently bought. Now, remember she paid $100,000 for that land so it currently sit on the balance sheet at $100,000. She was so excited that it was worth more $100,000 and she couldn't figure out what to do about it on the books. In this situation, she doesn't record anything in the books. Recall that standard setters struggle to set standards that introduce relevance and reliability into the financial statement. Would it be relevant to the financial statement user to know that the market value of the Garden Spots land had increased to $120,000? Yes, it would. Is it difficult to get a reliable estimate of that value? It's extremely difficult to get a reliable estimate. So in the US, standard setters have traded off relevance in favor of reliability and we continue to hold assets like this on the books at their historical cost. So she makes no entry at this point in time. Let's take a look at Transaction 16. On December 31st, the last day of the year, the company declared it would pay dividends of $8,000 on January 31st of the following year. So its not paying the dividends in the current year too, it will wait till the following year but it is declare that the will pay us. Under US gap, when the company declares dividends, there proceed does making a commitment to pay them and a require record a reliability on the books at that time. So what they would do at the time of declaring dividends. As it they would record a left hand side to retained earnings. Because remember, dividends are paid out of retained earnings. They'd make a note that those are dividends, they decrease retained earnings for $8,000. And they'd record a right hand side to a liabilities. I'll call it dividend payable. Payable. And that represents their obligation to make that payment in the future based on their declaration that they were going to pay the dividend. We could give the liability another name if we wanted to. We can call it dividends that the company has declared that it will pay but the important point is that it's a liability. Then in the future, the following year when the dividend is paid, we can take the liability off the books. Because that liability will have been satisfied. And of course, we've made the right hand side to cash to represent The decrease in the cash balance from paying the dividends, okay? So with this particular situation that the Garden Spot, the company has declared that it will pay dividends but it has not paid them yet so we just record the reduction to retained earnings in the right hand side to the dividend payable liability to represent that there's an obligation to pay.
