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 $ 870
Loss on sale of equipment 2,900
From the Balance Sheet
Beginning equipment 20,300
Ending equipment 11,000
Beginning accumulated depreciation 1,980
Ending accumulated depreciation 1,750

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? (Input the amount as positive value.)
3. What amount related to the sale would be added or subtracted in the computation of Net Cash Flows from Investing Activities? (Input the amount as positive value.)

Beginning Balance $ 1980 (credit), Profit and loss - Depreciation $ 870 (credit), Ending Balance $ 1750 (debit), Balancing figure $ 1100 (1980+870-1750) is the Accumulated Depreciation on Equipment Sold

Cash Received on Sale

This figure is figure is obtained from Equipment Disposal Account.

Open the Account as follows:

Cost of Equipment Sold $ 9300 (debit), Accumulated depreciation on equipment sold $1100(credit),Loss on Sale of Equipment $2900(credit),the Balancing figure $5300 (9300-1100-2900)

Part 2

Loss on sale of Equipment is the only Income Statement Item affecting the Operating Activity of the Cash Flow Statement.

Add back to Operating profit since this is a non-cash item and was initially deducted in the calculation of Operating Profit.

Part 3

Sale of Equipment results in Cash Inflow and affects the Cash Flows from Investing Activities Section of Cash Flow Statement.

Hence a positive amount should be added to reflect this inflow.

anthougo anthougo · Answer 2 · 2021-11-11T20:38:45+01:00

1. The original cost of the equipment sold is $9,300 with accumulated depreciation of $1,100, and the cash received from the sale is $5,300.

2. The amount related to the sale of the equipment to be added back to the computation of the net cash flows from operating activities is $2,900. This amount (loss from sale) was earlier subtracted to arrive at the net income.

3. The amount related to the sale of the equipment that would be added to the net cash flows from investing activities is $5,300 (cash inflow), being the sales proceed.

Data and Calculations on T-accounts:

Equipment Account

Account Titles Debit Credit

Beginning balance $20,300

Sale of equipment $9,300

Ending balance $11,000

Accumulated Depreciation Account

Account Titles Debit Credit

Beginning balance $1,980

Depreciation 870

Sale of equipment $1,100

Ending balance $1,750

Sale of Equipment Account

Account Titles Debit Credit

Equipment account $9,300

Accumulated depreciation $1,100

Loss: sale of equipment 2,900

Cash 5,300

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