Question

Fixed Assets Below is selected information taken from the balance sheet of LongLi Corporation as of 12/31/06.    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? Please show all work to process throughly thnk you!

Answer 1

Gross book value of the equipemnt sold by the company = Cost of the equipment purchased = $14000

Net book value of the equipment that was sold as on 31-12-2006 before depreciation=

Sale value of equipment + Loss on Sale of equipment + depreciation expenses for the year on the equipment

therefore , it is = $2000 +$5000+$1200 =$8200

Net book value of the equipment that was sold as on 31-12-2006 after depreciation= $2000+$5000 =$7000

Note : Depreciation for the equipment sold = (total asset cost- scrap value)/ useful life of asset =( 14000 -2000) /10 =1200

Effect on 2005's finanical statements

As 2005's financial statements already finalised and presented we cannot make any changes in it.

But there will be effect of change of depreciation due to change of useful life of assets.The same can be disclosed in the notes alone.

Effect on 2006's finanical statements

In 2006's financial statements the depreciation calculated and charged to Income statement will be based on the useful life of the equipment as 10 years

so there will be change in the amount of depreciation already charged lets see the calculations

Cost of equipment purchased =$14000

Scrap value / sale value = $ 2000

Useful life of equipment sold till 2006 = 10 years

Depreciation per year of the equipment sold =( $14000 - $2000) /10 =$1200

Depreciation till the year 2006 = Gross book value - Netbook value before depreciation = $14000 - $8200 =$5800

So total number of years the equipment put to use = $5800/$1200 = 4.8 years

If the number of useful life years is revised to 15 years in 2006 then

Depreciation for each year will be = ($14000 -$2000) /15 = $800

Depreciation for 4.8 years already gone = $800*4.8 years =$3840

Excess of depreciation charged over 4.8 years =$5800 - $3840 =$1960

Being the equipment sold in 2006 the excess depreciation of $ 1960 to be reversed.

It is to be disclosed as notes to financial statements with regard to change of useful life of equipment along the excess depreciation reversed.