ABC Ltd provided the following information related to its long term assets: Year 1 Year 2 Plant and equipment $780,000 $700,000 Accumulated dpn ($224,000) ($230,000) Dpn expense $43,000 $31,000 Gain on sale of equipment - $22,000 There were no purchases of plant and equipment during the year. Gulf Plane’s net investing cash flows for Year 2 is closest to: A) $33,000 B $77,000 C) $108,000 THe answer is B) - In Schweser notes they ignore Accumulated depreciation in their calculation of Net Investing cash flows. Why do we include them in the calculation here. - The calculation of Original net BV is 780,000-224,000 - 31,000 = 525,000 and BV of Year 2 is simply 700,000-230,000 = $470,000. Why is it that we subtract Year 2’s dpn expense from the original bookvalue and not the Year 1 dpn expense? Why is dpn expense each year not included in accumulated dpn for the year? is it because Depreciation expense is listed for the previous year?? Please somebody clear this up for me. Thanks
I can’t see how calculating BV gives the right answer. But CFI includes cash from sale and purchase of P&E. So cash from sale of equipment=decrease in asset+gain on sale=80,000+22,000=102,000. "Accumulated dpn are igonored when they don’t represent cash expenses.’ However, in this case,dpn expense in year 2 is 31,000 while accumulated dpn increase by 6,000. so the net dpn expense is 25,000. Subtract 25,000 from 102,000 gives the answer 7,700. I don’t know my calculation is right though. that’s the way I understand it.
Are you sure they’ve got the question right? The firm’s name is ABC in the beginning of the question… and then it changes to guld plane… Or did you just change the name to ABC?
can i just clarify, the gain is $22,000 right? ie it’s not a loss of $22,000? (I’m getting confused by the - sign, not sure if you mean a dash or a minus) here’s how to work these out, as I understand it, please correct me if I’m mistaken. 1) work out historical cost of asset. (the difference between the current value of plant and equipment, which doesn’t include the asset because it was sold, and the year prior.) $780,000 - $700,000 = $80,000 2) work out the accumulated depreciation on the asset: Accumulated depreciation for the year prior + current year’s depreciation expense - ending accumulated depreciation. $224,000 + $31,000 - $230,000 = $25,000 3) Asset book value = historical cost - accumulated depreciation = $80,000 - $25,000 = $55,000. The profit or loss on the sale is calculated as sale price - book value. From this, you can rearrange to get the sale price ie 22,000 = x - $55,000 x = $77,000
You got it Kiakaha.
Sorry the formatting screwed up when i posted. the dash is suppose to mean nil or $0 for Year 1. Sorry i was changing the question for copyright purposes and forgot to change the name of the company to ABC. Thanks Kiakaha