Question

Typewritten answers only, please. No handwritten answers.

Un Company sold office equipment with a cost of $44,060 and accumulated depreciation of $39,243 for $6,400.

What is the book value of the asset at the time of sale?

What is the amount of gain or loss on the disposal?

How would the sale affect net income (increase, decrease, no effect) and by how much?

How would the sale affect the amount of total assets shown on the balance sheet (increase, decrease, no effect) and by how much?

How would the event affect the statement of cash flows (inflow, outflow, no effect) and in what section?

Typewritten answers only, please. No handwritten answers.

Answer 1

1. Book Value of the asset = $4,187

Calculation:

Original Cost of the asset = $44,060

Accumulated depreciation = $39,243

Book Value (carrying value) of the asset = $440,60 - $39,243 = $4,817

2. Gain on sale (disposal) of the asset = $1,583

Calculation:

Book Value of the asset (Calculated above) = $4,817

Sale value of the asset = $6,400

Gain on sale of the asset = Sale value - Book Value = $6,400 - $4,817 = $1,583

3. Affect on net income

Since the asset is disposed for a gain of $1,583, net income would be increased by the $1,583.

4. Affect of sale on the amount of total assets shown on the balance sheet

• The disposal of asset involves eliminating assets from accounting records.
• On the balance sheet, an asset is presented at its original cost net of accumulated depreciation.
• Upon disposal of the asset, Fixed assets decrease by the book value of the asset sold which is $4,817. At the same time, current assets increase by the amount of the cash received which is $6,400. So the ultimate effect would be = $6,400 - $4,817 = $1,583 increase.

5. Affect of sale on the statement of cash flows

• The affect would be a cash inflow as the cash is increased by $6,400 upon disposal of the asset.
• The sale of the asset will be shown under 'Cash flows from Investing activities'