Indicate how each event affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = IDecrease = DNo Effect = NA(Note that "No Effect" means that the event does not effect that element of the financial statements or that the event causes an increase in that element that is offset by a decrease in that same element.) On January 1, Year 1, the Baker Company purchased an asset for $200,000. The asset had a $50,000 salvage value and a 10-year life. Baker uses the straight-line method. At the beginning of Year 3, the asset was sold for $174,000. Show how the sale will affect Baker's financial statements, assuming that Baker uses straight-line

Question

depreciation.AssetsLiabilitiesStk. EquityRevenuesExpensesNetStmt. of ?IncomeCash Flows???????

What will be an ideal response?

Answer 1

(I) (NA) (I) (I) (NA) (I) (I)
Annual depreciation expense = (Cost of $200,000 ? Salvage value of $50,000) ÷ 10 years = $15,000
Accumulated depreciation at beginning of Year 3 = $15,000 per year × 2 years = $30,000
Book value at beginning of Year 3 = Cost of $200,000 ? Accumulated depreciation of $30,000 = $170,000
Gain on sale = Proceeds of $174,000 ? Book value of $170,000 = $4,000
The sale at a gain increases assets (cash) by $174,000, decreases assets (equipment) by $200,000, increases assets (accumulated depreciation) by $30,000, and increases stockholders' equity (retained earnings) by $4,000. It increases revenues (gain on sale of equipment) by $4,000, which increases net income. The amount received of $174,000 is reported as a cash inflow for investing activities on the statement of cash flows.