A machine with a cost of $130,000, accumulated depreciation of $85,000, and current year depreciation expense of $17,000 is sold for $40,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:A. $45,000.B. $5,000.C. $17,000.D. $28,000.E. $40,000.
Business · High School · Wed Jan 13 2021
Answered on
The amount that should be reported as a source of cash under cash flows from investing activities is **E. $40,000**.
To determine the amount reported under cash flows from investing activities, you need to look at the cash received from the sale of the machine. When an asset is sold, the cash received is considered an inflow in the investing activities section of the cash flow statement irrespective of the gain or loss on the sale.
In this case, the machine is sold for $40,000 cash. Therefore, the cash inflow under investing activities is $40,000.
Extra: When a business sells an asset, it can have either a gain or loss on the sale, but regardless of the gain or loss, the cash received from the transaction is reported in the investing section of the cash flow statement.
The gain or loss on the sale of an asset is calculated by comparing the net book value (cost minus accumulated depreciation) of the asset to the sale proceeds.
In this particular problem, the net book value of the machine at the time of sale is:
Cost of the machine: $130,000 Less: Accumulated depreciation (prior to current year): $85,000 Less: Current year depreciation expense: $17,000 Net book value = $130,000 - $85,000 - $17,000 = $28,000
The machine is sold for $40,000, and thus the company realizes a gain on the sale:
Sale proceeds: $40,000 Less: Net book value: $28,000 Gain on sale = $40,000 - $28,000 = $12,000
The gain or loss on sale of the asset is reported in the income statement, and the cash received (in this case $40,000) is recorded in the cash flow statement under the investing activities section. The gain or loss itself does not affect the cash flow statement - it merely changes the net income in the operating activities section indirectly, as the operating income is adjusted by the non-cash expenses (such as depreciation) and any gains or losses on the sale of assets