Taken from the balance sheet of LongLi Corporation as of 12/31/2006 12/31/2005 1
ID: 2540749 • Letter: T
Question
Taken from the balance sheet of LongLi Corporation as of 12/31/2006
12/31/2005 12/31/2006
Gross plant, property, and equipment $20,000 $25,000
Accumulated depreciation $10,000 $10,000
From the operating section of the statement of cash flows, you determine that the depreciation expense for the year was $2,000 and loss on sales of assets was $5,000. The investing section reveals that the company purchased equipment for $14,000 and sold equipment for $2,000.In the footnotes to the financial statements, the company states:At the beginning of 2006, we determined that the useful life of our assets was higher than originally believed. Accordingly we have increased the useful life from 10 years to 15 years in 2006.
a. What was the gross book value of the equipment that was sold?
b. What was the net book value of the equipment that was sold?
c. With respect to the change in the useful lives of the assets:
i. What is the effect on 2005's financial statements?
ii. What is the effect on 2006's financial statements?
Explanation / Answer
Solution a & b:
Sale value of equipment = $2,000
Loss on sale of equipment = $5,000
Carrying value of equipment sold = $2,000 + $5,000 = $7,000
Accumulated depreciation on assets sold = Opening Accumulated depreciation + Depreciation for the year - Closing accumulated depreciation
= $10,000 + $2,000 - $10,000 = $2,000
Hence Groos book value of equipment sold = Carrying value + Accumulated depreciation on equipment sold
= $7,000 + $2,000 = $9,000
Net book value of equipment sold = $7,000
Solution c:
There will be no effect on financial statement of 2005 as change in useful life is change in accounting estimates that should be recognised prospectively.
For 2006 financial statemnet, depreciation will be charged on Gross value of propety plant and equipment on the basis of remaining useful life of assets.
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