Allison Controls Ltd. follows a policy of paying cash for everything it buys. At the end of 2011 Allison had a balance in its machine account of $90,000 and the associated accumulated depreciation account of $45,000. Similar amounts at the end of 2010 were $100,000 and $50,000 respectively. During 2011 Allison sold a machine for $10,000. It had cost $25,000 and had accumulated depreciation of $10,000 at the time of the sale. How would these amounts appear on the income and cash flow statements?

Question

Quizplus · Accepted Answer

The loss on the income statement is calculated as the difference between the machine's selling price ($10,000) and its book value at the time of sale. The book value is the cost ($25,000) minus accumulated depreciation ($10,000), which equals $15,000. Therefore, the loss is $5,000 ($10,000 - $15,000). The cash flow statement reflects the cash received from the sale, which is $10,000, without any direct impact from the loss calculation. However, the net cash outflow for the machine transactions includes the purchase of new machinery, which can be inferred from the change in the machine account balance and the sale of the old machine. The machine account decreased by $10,000 ($100,000 - $90,000), but considering the sale of the old machine for $10,000, it indicates that no additional cash was spent on purchasing new machinery beyond the proceeds from the sale. Therefore, the net cash outflow directly associated with these transactions is $5,000, reflecting the loss on the sale, but not an additional cash outflow for purchases.