Question

During the period, Sanchez Company sold some excess equipment at a loss. The following information was collected from the company’s accounting records

From the Income Statement
Depreciation expense	$	830
Loss on sale of equipment		3,500
From the Balance Sheet
Beginning equipment		19,900
Ending equipment		11,400
Beginning accumulated depreciation		1,860
Ending accumulated depreciation		1,760

No new equipment was bought during the period.

Required:  

1. For the equipment that was sold, determine its original cost, its accumulated depreciation, and the cash received from the sale. (Use the equipment and accumulated depreciation T-accounts to infer the book value of the equipment sold.)

2. Sanchez Company uses the indirect method for the Operating Activities section of the cash flow statement. What amount related to the sale would be added or subtracted in the computation of Net Cash Flows from Operating Activities?

Answer 1

Solution:

1. Cost of equipment sold = Opening balance of equipment - Closing balance of equipment

= $19,900 - $11,400

= $8,500

Cost of equipment sold (Original cost)

$8,500

.

Accumulated depreciation on equipment sold = (Beginning accumulated depreciation + Depreciation expense) - Ending accumulated depreciation.

= ($1,860 + $830) - $1,760

= $930.

Accumulated depreciation on equipment sold

$930.

.

Cash received from sale = Original cost - Accumulated depreciation on equipment sold - Loss on sale of equipment.

= $8,500 - $930 - $3,500.

= $4,070.

Cash received from sale

$4,070.

Answer 2:  Loss on sale of equipment $3,500 will be added in the net cash flow from operating activities.