A company bought $250,000 of equipment with an expected life of ten years and no residual value.After six years the company sold the equipment for $94,000.If it 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?
A)$94,000 is recorded as a cash inflow from investing activities and no other sections of the statement are affected.
B)$94,000 is recorded as a cash inflow from investing activities and $6,000 is added to convert net income to net cash flow from operating activities.
C)$94,000 is recorded as a cash inflow from investing activities and $6,000 is subtracted to convert net income to net cash flow from operating activities.
D)$94,000 is recorded as a cash inflow from operating activities.

Question

Quizplus · Accepted Answer

The sale of the equipment for $94,000 would be recorded as a cash inflow from investing activities. However, since the company used straight-line depreciation, it would have recorded a depreciation expense of $25,000 per year ($250,000/10 years) over the six years, totaling $150,000. Therefore, to convert net income to net cash flow from operating activities, $6,000 ($150,000 depreciation expense minus the $94,000 sale) would need to be added. So the correct answer is B.

A Company Bought $250,000 of Equipment with an Expected Life