Problem 10 - Accounting

Question

An analysis of the general ledger accounts indicates that delivery equipment, which cost \(\$ 45,000\) and on which accumulated depreciation totaled \(\$ 32,000\) on the date of sale, was sold for \(\$ 15,000\) during the year. Using this information, indicate the items to be reported on the statement of cash flows.

Step-by-Step Solution

Answer

Report $15,000 as cash inflow under investing activities and a $2,000 gain in operating activities.

Step 1: Determine Cash Received from Sale

The equipment was sold for $15,000. This amount is the cash inflow from the sale and should be reported in the cash flow statement under investing activities.

Step 2: Calculate Book Value of Equipment

To find the book value, subtract the accumulated depreciation from the original cost of the equipment. \[\text{Book Value} = \text{Original Cost} - \text{Accumulated Depreciation} = \\(45,000 - \\)32,000 = \$13,000\]

Step 3: Calculate Gain or Loss on Sale

The gain or loss on the sale is calculated by subtracting the book value from the sale price.\[\text{Gain/Loss} = \text{Sale Price} - \text{Book Value} = \\(15,000 - \\)13,000 = \\(2,000\]Since the sale price is greater than the book value, a gain of \)2,000 should be recorded.

Step 4: Reporting on the Statement of Cash Flows

On the statement of cash flows, the cash inflow of $15,000 from the sale of the equipment is reported under investing activities. The gain on sale of $2,000 is included in the operating activities section, typically as an adjustment to net income.

Key Concepts

Investing Activities

Investing activities refer to transactions involving the purchase or sale of long-term assets, like property, equipment, and securities. In the statement of cash flows, such activities are illustrated under the investing section. This section gives investors insights into how a company allocates cash for long-term growth.

• When assets are sold, any cash received is a positive cash inflow.
• Conversely, cash used to purchase assets is a cash outflow.

In the given scenario, the sale of delivery equipment for $15,000 is recorded under investing activities as a cash inflow. Tracking these cash flows helps stakeholders understand how much is being spent on expanding or reducing the company's asset base.

Book Value

Book value is a crucial term used to describe the value of an asset as recorded on the balance sheet. It represents the original cost of an asset minus its accumulated depreciation. Essentially, it shows what the asset is theoretically worth at a given point in time.

• Calculated as: \[\text{Book Value} = \text{Original Cost} - \text{Accumulated Depreciation}\]
• Helps in determining gain or loss during asset sales.

For the delivery equipment, with an original cost of \(45,000 and accumulated depreciation of \)32,000, the book value is $13,000. This helps in assessing its remaining worth and is a foundation for further calculations like gain or loss during the sale.

Accumulated Depreciation

Accumulated depreciation is the total depreciation of an asset that has been recorded up to a particular date. It reflects the loss in value of an asset over time due to wear and tear or obsolescence.

• Acted as a buffer, keeping track of all past depreciation expenses.
• Helps in calculating the current book value of an asset.

In our example, before the equipment was sold, it had an accumulated depreciation of $32,000. By using this figure, one can determine the asset's book value and evaluate whether its remaining worth justifies a manual review or sale strategy.

Gain on Sale

Gain on sale occurs when an asset is sold for more than its book value. While not directly recorded under investing activities, the gain affects the overall financial results of a company.

• Calculated using the formula:\[\text{Gain} = \text{Sale Price} - \text{Book Value}\]
• Reported in the operating section of the cash flow statement, affecting net income.

For the sale of delivery equipment, the asset was sold for \(15,000 while its book value stood at \)13,000, resulting in a gain of $2,000. This gain is acknowledged separately as it provides insight into how well the company executes its investment strategies and its effectiveness of managing assets.