Preston Corporation uses the indirect method to prepare the cash flow from operating activities section of the statement of cash flows. The company had the following beginning and ending balances for Year 2:?Jan. 1Dec. 31Equipment$850,000$900,000Accumulated depreciation300,000280,000During Year 2, Preston sold equipment for $60,000 that had originally been purchased for $140,000. The old equipment had accumulated depreciation of $120,000 at the time of sale. To replace the equipment, Preston purchased new equipment by making a $30,000 down payment and signing a two-year note for the balance due of $160,000. Required:a) What was the cost of the new equipment purchased during the year?b) What is the gain or loss on the sale of the old equipment? c) How will the gain or loss be reported
on the statement of cash flows?d) How will the sale of the equipment be reported in the cash flow from investing activities section of the statement of cash flows?e) How will the purchase of equipment be reported in the cash flow from investing activities section of the statement of cash flows?f) How will the issuance of the two-year note be reported on the statement of cash flows?
What will be an ideal response?
a) $190,000
b) Gain of $40,000
c) The gain of $40,000 will be subtracted from net income to compute cash flow from operating activities.
d) The $60,000 proceeds from the sale will be reported as a cash inflow in the investing activities section.
e) The $30,000 down payment for new equipment will be reported as a cash outflow in the investing activities section.
f) The issuance of the two-year note in the amount of $160,000 will be reported in the schedule of noncash investing and financing activities.
a)
Ending equipment account balance of $900,000 = Beginning equipment account balance of $850,000 + Cost of new equipment purchased (the unknown) ? Cost of new equipment sold of $140,000
Cost of new equipment purchased = $900,000 ? $850,000 + $140,000 = $190,000
b)
Book value of equipment sold = Cost of $140,000 ? Accumulated depreciation of $120,000 = $20,000
Gain on sale = Selling price of $60,000 ? Book value of $20,000 = $40,000
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