Question

A company bought $250,000 of equipment with an expected life of ten years and no residual value. After six years the company sold the equipment for $94,000. If the company uses straight-line depreciation and the indirect method is used to determine cash flows from operating activities, which of the following reflects how the sale of the equipment would be reported in the statement of cash flows

Answer 1

Answer:

B.$94,000 is recorded as a cash inflow from investing activities and $6,000 is added to convert net income to net cash flow from operating activities.

Explanation:

Cost of equipment = $250,000

Useful life =  10 years

Annual depreciation = $250,000/10

                                  = $25,000

The asset was used for 6 years therefore,

Accumulated depreciation = $25,000 × 6

                                             = $150,000

Netbook value of equipment = $250,000 - $150,000

                                                 = $100,000

Proceed from disposal = $94,000

Loss on disposal = $94,000 - $100,000

                            = - $6,000

As represented in the cash flow statements

• The proceed from disposal ($94,000) is recognized as an inflow in the  cash flows from investing activities.
• The loss of $6,000 on disposal is added back to the net net income in net cash flow from operating activities. Same as the depreciation of $25,000.