A Mock question

[Amelia]

I understand the logic of the answer, which involves using two formulas:

1. Net book value (ending)= Net book value (beginning) + Purchase - Depreciation - Net book value (Disposal)

2. After computing Net book value (disposal) from formula 1, we use the following formula:
   Proceeds = Net book value (Disposal) - loss

My questions are with the following formula:
When putting numbers into the first formula:

Net book value (ending): 105-46=59
Purchase: 10
But according to the table, the change in equipment is 5, why does the question state the capital expenditure is 10?

Depreciation: 8 (as indicated in the question)
But according to the table, the change of “accumulated depreciation” is 6, why shouldn’t we use 6 instead of 8?

After computing disposal Net book value from formula 1, we can then use the result in formula 2 to compute Proceeds.

Anyone can help me with the above 2 questions? Thank you very much in advance!

[fino_abama]

Let’s go by line item.

Equipment
Ending equipment = Beginning Equipment + Purchase - Sale
105m = 100m + 10m - Sale
Sale = 100m + 10m - 105m = 5m

So the historical cost of the equipment sold is $5m

Accumulated Depreciation
Ending Acc Dep = Beginning Acc Dep + Depreciation exp - Depreciation of Equipment Sold
46m = 40m + 8m - Depreciation of Equipment Sold
Depreciation of Equipment Sold = 40m + 8m - 46m = $2m

So, the net book value of the equipment sold = $5m - $2m = $3m

Gain on sale of equipment = Sales proceeds - Net book value
-2m = Sales proceeds - 3m
Sales proceeds = -2m + 3m = $1m

[Amelia]

Thank you very much! I got stuck at the “historical cost” part and now it’s all clear: the decrease of the equipment is due to the substraction of the historical cost. Much appreciate your help!

[fino_abama]

No problem