Question

Un Company sold office equipment with a cost of $23,000 and accumulated depreciation of $12,000 for $14,000. Required a. What is the book value of the asset at the time of sale? b. What is the amount of gain or loss on the disposal? c. How would the sale affect net income (increase, decrease, no effect) and by how much? d. How would the sale affect the amount of total assets shown on the balance sheet (increase, decrease, no effect) and by how much? e. How would the event affect the statement of cash flows (inflow, outflow, no effect) and in what section?

Answer 1

Answer:

a. $11,000

b. $3,000

c. The sale would increase net income as it resulted in a gain on disposal of $3,000.

d. The sale would result a net decrease of assets by the net book value $11,000

e. The sale would be accounted for in the investing section of the cash flow statement as an inflow of $14,000

Explanation:

When an asset is purchased, debit asset , credit cash. To account for depreciation, debit depreciation expense and credit accumulated depreciation. The difference between the accumulated depreciation and the historical cost gives the net book value or the carrying amount.

An asset that is sold must be derecognized from the books after the sale. This is done by crediting the historical cost and debiting the disposal account with the cost, debiting the accumulated depreciation and crediting disposal account with the accumulated depreciation balance at the time disposal.

The amount received from the disposal less the carrying amount gives the gain/loss on sale. where a gain is made, net income increases otherwise, it decreases.

In the cash flow statement, the depreciation is added back to net income in the operating activities segment because it is a non cash item that was deducted in the course of computing net income in the p/l. while the amount received would be recorded in the investing section as an inflow of cash.

Net book value of asset at point of sale

=$23,000 - $12,000

= $11,000

Gain or (loss) on disposal

= $14,000 - $11,000

= $3,000