On January 1, 20Y1, Martin Manufacturing paid cash for a new piece of manufactur
ID: 2466593 • Letter: O
Question
On January 1, 20Y1, Martin Manufacturing paid cash for a new piece of manufacturing equipment. The machine cost $40,000 and had an estimated useful life of 5 years with a $5,000 salvage value. Martin uses the double-declining balance method of depreciation and the direct method of presenting operating cash flows. During 20Y2, brand new technology was developed in Martin’s industry. If Martin does not adjust, it will lose sales, as the new technology enables its competitors to produce a higher quality product using less time and materials. This development triggered an impairment analysis of Martin’s existing machinery at the end of the year. 20Y2 depreciation had already been recorded by the time of the analysis. The manufacturing equipment purchased in 20Y1 now has an expected future cash flow of $12,000 and a fair market value of $2,000. Using the following template, please show how the above transactions impacted Martin’s Statement of Cash Flows, Income Statement, and Balance Sheet for 20Y1 and 20Y2. For the Balance Sheet, indicate cumulative changes to the Balance Sheet as a result of this transaction. These amounts will not necessarily equal the ending balances in the Balance Sheet accounts. Some lines might not have answers. List account names or transaction descriptions in the first column and amounts in the second and third columns.
Statement of Cash Flows 20Y1 20Y2
Net Change in Cash Flow
Income Statement 20Y1 20Y2
Net Income
Balance Sheet (current period changes for 20Y1; cumulative changes for 20Y2)
ASSETS: 20Y1 20Y2
Change in Assets
LIABILITIES + EQUITY:
Change in Liabilities + Equity
Explanation / Answer
Statement of Cash Flows 20Y1 20Y2 Cash Flow from Investing Activity -40000 2000 Net change -38000 Ignore Future Expected Cash Flow of $12000,as the Fair market value is $2000, so it will not fetch more than that. Income Statement 20Y1 20Y2 Depreciation for the Year -16000 -22000 Change in Net Income -6000 Balance Sheet Assets 20Y1 20Y2 Equipment 40000 24000 Accumulated Depreciation -16000 -24000 Net Asset 24000 NIL Cash -40000 2000 Liabilitites and Equity Retained Earnings -16000 -22000 Statement of Cash Flows 20Y1 20Y2 Cash Flow from Investing Activity -40000 2000 Net change -38000 Ignore Future Expected Cash Flow of $12000,as the Fair market value is $2000, so it will not fetch more than that. Income Statement 20Y1 20Y2 Depreciation for the Year -16000 -22000 Change in Net Income -6000 Balance Sheet Assets 20Y1 20Y2 Equipment 40000 24000 Accumulated Depreciation -16000 -24000 Net Asset 24000 NIL Cash -40000 2000 Liabilitites and Equity Retained Earnings -16000 -22000