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Favre Company reports depreciation expense of $54,000 for Year 2. Also, equipment costing $182,000 was sold for a $11,400 loss in Year 2. The following selected information is available for Favre Company from its comparative balance sheet. Compute the cash received from the sale of the equipment. At December 31 Year 2 Year 1Equipment $ 680,000   $ 862,000  Accumulated Depreciation-Equipment   484,000     570,000

Question

Favre Company reports depreciation expense of 54,000forYear2.Also,equipmentcosting54,000 for Year 2. Also, equipment costing 182,000 was sold for a 11,400lossinYear2.ThefollowingselectedinformationisavailableforFavreCompanyfromitscomparativebalancesheet.Computethecashreceivedfromthesaleoftheequipment. AtDecember31Year2Year1Equipment11,400 loss in Year 2. The following selected information is available for Favre Company from its comparative balance sheet. Compute the cash received from the sale of the equipment. At December 31 Year 2 Year 1Equipment 680,000   $ 862,000  Accumulated Depreciation-Equipment   484,000     570,000

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Solution

To calculate the cash received from the sale of the equipment, we need to follow these steps:

  1. Calculate the change in the net book value of the equipment from Year 1 to Year 2. The net book value is the original cost of the equipment minus accumulated depreciation.

    For Year 1, the net book value is 862,000(originalcost)−862,000 (original cost) - 570,000 (accumulated depreciation) = $292,000.

    For Year 2, the net book value is 680,000(originalcost)−680,000 (original cost) - 484,000 (accumulated depreciation) = $196,000.

    The change in net book value from Year 1 to Year 2 is 292,000−292,000 - 196,000 = $96,000. This is the decrease in net book value.

  2. The decrease in net book value is due to two factors: depreciation and the sale of equipment. We know that the depreciation for Year 2 is 54,000.So,thedecreaseinnetbookvalueduetothesaleofequipmentis54,000. So, the decrease in net book value due to the sale of equipment is 96,000 (total decrease) - 54,000(depreciation)=54,000 (depreciation) = 42,000.

  3. We also know that the equipment was sold at a loss of 11,400.Thismeansthatthecashreceivedfromthesaleoftheequipmentisthedecreaseinnetbookvalueduetothesale(11,400. This means that the cash received from the sale of the equipment is the decrease in net book value due to the sale (42,000) minus the loss (11,400)=11,400) = 30,600.

So, Favre Company received $30,600 in cash from the sale of the equipment.

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