Question

Fama Corp sold some plant assets during 2020 for $265,000. The original cost to Fama of these assets was $1,830,000. The accumulated depreciation on these particular assets was $1,350,000 at December 31, 2019, and was $1,500,000 at the time of the sale in 2020. Fama uses the indirect method for its statement of cash flows. In reconciling net income to cash flows from operations

1.what is the net effect (i.e., addition or subtraction) stemming from these plant assets for the year ended December 31, 2020?

2. What is the net effect on cash flows from investing activities for the year ended December 31, 2020, stemming from these plant assets?

3. What is the net effect on cash flows from financing activities for the year ended December 31, 2020, from these plant assets?

Answer 1

Cost price of plant asset = $1,830,000

Sale price of plant assets = $265,000

Accumulated depreciation on December 31, 2019 = $1,350,000

Accumulated depreciation at the time of sale = $1,500,000

Hence, depreciation expense for the year 2020 = Accumulated depreciation at the time of sale - Accumulated depreciation on December 31, 2019

= 1,500,000 - 1,350,000

= $150,000

Book value of plant assets at the time of sale = Cost price of plant asset - Accumulated depreciation at the time of sale

= 1,830,000 - 1,500,000

= $330,000

Loss on sale plant asset = Book value of plant assets at the time of sale - Sale price of plant assets

= 330,000 - 265,000

= $65,000

1.

In cash flow from operating activities section, following two item will be added :

i) Loss on sale of plant assets of $65,000

ii) Depreciation expense = 150,000

Thus, cash in flow from operating activities will increase by = Loss on sale of plant assets + Depreciation expense

= 65,000 + 150,000

= $215,000

2.

In the cash flow from investing activities, sale of plant assets of $265,000 will be added.

Cash flows from investing activities will increase by $265,000

3.

Plant assets activities will not effect cash flows from financing activities.

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