A company bought $1,050,000 of equipment with an expected life of 26 years and n

Question

A company bought $1,050,000 of equipment with an expected life of 26 years and no residual value. After 22 years the company sold the equipment for $124,500. If the company uses straight-line depreciation and the indirect method is used to determine cash flows from operating activities, which of the following reflects how the sale of the equipment would be reported in the statement of cash flows? (Do not round intermediate calculations. Round your answer to nearest whole number.)

a -$124,500 is recorded as a cash inflow from operating activities.

b - $124,500 is recorded as a cash inflow from investing activities and $37,038 is added to convert net income to net cash flow provided by operating activities.

c - $124,500 is recorded as a cash inflow from investing activities and no other sections of the statement are affected.

d - $124,500 is recorded as a cash inflow from investing activities and $37,038 is subtracted to convert net income to net cash flow provided by operating activities.

Explanation / Answer

Book Value of the equipment after 22 years of depreciation

= 1050000 - (1050000*22/26)

= $161538

Loss on sale = 161538 - 124500 = $37038

Loss on Sale of $37038 will be added to the net income to net cash flow provided by operating activities.

$124500 is recorded as a cash inflow from investing activities.

Thus, correct answer is b.

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