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, Jenkins Company purchased equipment for $25,000. The equipment had an estimated useful life of four years and an estimated salvage value of $5,000. Jenkins uses the straight-line method. At the beginning of Year 3, the equipment was sold for $8,000. Show how the sale affected the financial statements for Year 3, assuming Jenkins uses

Question

straight-line depreciation.AssetsLiabilitiesStk. EquityRevenuesExpensesNetStmt. of ?IncomeCash Flows???????

What will be an ideal response?

Answer 1

(D) (NA) (D) (NA) (I) (D) (I)
Annual depreciation expense = (Cost of $25,000 ? Salvage value of $5,000) ÷ 4 years = $5,000
Accumulated depreciation at beginning of Year 3 = $5,000 per year × 2 years = $10,000
Book value at beginning of Year 3 = Cost of $25,000 ? Accumulated depreciation of $10,000 = $15,000
Loss on sale = Book value of $15,000 ? Proceeds of $8,000 = $7,000
The sale at a loss increases assets (cash) by $8,000, decreases assets (equipment) by $25,000, increases assets (accumulated depreciation) by $10,000, and decreases stockholders' equity (retained earnings) by $7,000. It increases expenses (loss on sale of equipment) by $7,000, which decreases net income. The amount received of $8,000 is reported as a cash inflow for investing activities on the statement of cash flows.