Question

What was the gain on the disposal of a piece of equipment if the equipment had a historical cost of $25,000, related accumulated depreciation of $13,500, and was sold for $15,500. In addition, in its last year, the equipment had produced 4,000 units of inventory that had been sold for $3.50 a piece. Each piece had an inventory cost of $1.75 a piece. What is goodwill on the balance sheet? What does a gain on the disposal of an asset represent? Why is the loss on the disposal of an asset considered a non-cash item? Current assets are $45,000. Current liabilities are $35,000. Long term assets are $60,000. Long term liabilities are $10,000. What is the current ratio?

Answer 1

1. What was the gain on the disposal of a piece of equipment if the equipment had a historical cost of $25,000, related accumulated depreciation of $13,500, and was sold for $15,500.

Gain on disposal of a piece of eequipment = Selling Value - Carrying Value of Asset

Gain on disposal of a piece of eequipment = $15,500 - ($25,000 - $13,500)

Gain on disposal of a piece of eequipment = $15,500 - $11,500

Gain on disposal of a piece of eequipment = $4,000

2. What is goodwill on the balance sheet?

In accounting, goodwill is an intangible asset. The concept of goodwill comes into play when a company looking to acquire another company is willing to pay a price significantly higher than the fair market value of the company’s net assets.

The elements or factors that make up the intangible asset of goodwill are comprised of things such as a company’s good reputation, a solid (loyal) customer or client base, brand identity and recognition, an especially talented workforce, and proprietary technology. These things are, in fact, valuable assets of a company, however, they are not tangible (physical) assets, nor can their value be precisely quantified.

Under US GAAP and IFRS Standards, goodwill is an intangible asset with an indefinite life, and thus does not need to be amortized. However, it needs to be evaluated for impairment yearly, and many companies choose to amortize goodwill over a 10-year period.

3. What does a gain on the disposal of an asset represent?

The gain on the sale of an asset used in a business is the difference between 1) the amount of cash that a company receives, and 2) the asset's book value (carrying value) at the time of the sale.

In order to know the asset's book value at the time of the sale, the depreciation expense for the asset must be recorded right up to the date that the asset is sold.

If the cash received is greater than the asset's book value, the difference is recorded as a gain.

The gain on disposal of asset represent the long term profit for the entity.

4. Why is the loss on the disposal of an asset considered a non-cash item?

Losses are non-cash adjustments because they correspond to long-term Assets purchased in PRIOR periods.

In other words, if you sell a $100 asset for $80, you need to record a Loss of $20 on the Income Statement… but you are NOT literally losing $20 in cash in THIS period!

It’s only a cash loss relative to what you paid for the asset a long time ago.

But the Income Statement and Cash Flow Statement show us ONLY what is happening in THIS year, so we count this as a non-cash adjustment.

Net Income on the CFS will be lower as a result of this, so we add back the Loss, and then show the Net Proceeds Received in Cash Flow from Investing.

So… we add back the Loss of $20 in CFO, and then in CFI, we subtract out the $20 again, and also show the book value of $100 for the Assets we just sold, so that $80 shows up in CFI.

5. What is the current ratio?

The current ratio, also known as the working capital ratio, measures the capability of a business to meet its short-term obligations that are due within a year. The ratio considers the weight of total current assets versus total current liabilities. It indicates the financial health of a company and how it can maximize the liquidity of its current assets to settle debt and payables. The Current Ratio formula (below) can be used to easily measure a company’s liquidity.

Current Ratio = Current Assets / Current Liabilities

Current Ratio = $45,000 / $35,000

Current Ratio = 1.29 times