Question

Romanova Inc. decides to sell an old piece of equipment and receives $5,000 cash for it. The original cost of the equipment was $50,000 and it had accumulated depreciation of $47,000 associated with it. Which of the following items would be increased by the sale of the old equipment?
a- Gain on Saleb- Net Incomec- Cash from Operating Activitiesd- Cash from Investing Activitiese- Total Assets

Answer 1

Solution :

The carrying value of the asset = $5000-47000$

                                                    $= 3000$

Equipment that is sold for $5000$, therefore, the profit is $2000.$

The net income gain on the sale - increase, the company is getting a gain from the sale.

The cash from the investing activities-increased. Thus the proceeds from the sale of the assets are recorded as the cash inflow.

The cash from the operating activities -- no change. While we calculate the operating cashflow, the gain on the sale of the assets added back to the income. So there is no change in the total.

The total assets -- increased. The carrying value will be zero after the sale, however, the cash on the balance sheet is then increased and it also captures gain. Now in order to balance the both sides, the net income increases the retained earnings section.