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Driver
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How do you answer this question?
In 2006 Triangle Corp. purchased a piece of equipment for $450,000. The equipment was estimated to have a ten-year life and it was amortized on a straight line basis. In 2010 the equipment was sold for $210,000 in cash.
What journal entry would be made to record the sale of the equipment?
How would the sale be reflected in the cash flow statement?
Would there be any effect of this transaction on the calculation of cash generated from operations?
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dwi
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Cost = 450,000; 10 yr life; Annual depreciation(not amortization) = 45,000. Sold in 2010, after 4 full years of depreciation, means its remaining Net Book Value = 450,000 less (45,000 x 4)= 270,000.
when sold, Dr Cash 210,000 Dr Accum Deprc 180,000 Cr Asset 450,000 Dr Loss on Sale 60,000
Cash Flow Statement would show Inflow of 210,000 under Investment section. Cash generated from Operations would not be affected
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Gadget
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Annual depreciation is ($450,000 / 10 years) = $45,000.
Accumulated Depreciation in 2010: $45,000 * 4 = $180,000
Asset sale for $210,000 cash.
Entry as follows:
Bank account (Cash) (Debit) $210,000
Fixed Asset Account (Credit) $450,000
Accumulated Depreciation (Debit)$180,000
Loss on sale of PP&E (Debit) $60,000
Cash flow from investing activities:
Proceeds from sale of equipment $210,000
No impact on the cash flow from operations using the direct method.
Using the indirect cash flow statement u would add back the $60,000 loss on sale of PP&E.
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