On January 1, 2016, Cowboys Surgical Supply Company purchased machinery for its
ID: 2559536 • Letter: O
Question
On January 1, 2016, Cowboys Surgical Supply Company purchased machinery for its production line for $104,000. Using an estimated useful life of eight years and a residual value of $8,000, the annual straight-line depreciation of the machinery was calculated to be $12,000. Cowboys Surgical Supply used the machinery during 2016 and 2017, but then decided to automate its production process. On December 31, 2017, Cowboys Surgical Supply sold the machinery at a loss of $5,000 and purchased new, fully automated machinery for $205,000.
How would the previous transactions be presented on Cowboys Surgical Supply Company's statements of cash flows for the years ended December 31, 2016 and 2017 and why would Cowboys Surgical Supply sell at a loss machinery that had a remaining useful life of six years and purchase new machinery with a cost almost twice that of the old?
Explanation / Answer
In 2016, The Company must have deducted $104,000 in Investing Activities in Cash Flow as Machinery Purchased as it is a Investment decision and any purchase or sale related to Fixed assets comes under Investing Activities.
As Depreciation is a NON cash expense so it must be added back in operating activities if calculating CFS by Indirect Method.
In 2017, As Depreciation is a NON cash expense so it must be added back in operating activities if calculating CFS by Indirect Method.
The company Sold the machinery at $75,000 (104,000 – 24,000 Dep. – 5000 Loss), this will added in Investing activities and purchase of New Machinery will be deducted in Investing Activities.
There are many reasons for which the company sells its old asset which has still useful life.
In this case the company purchased Automated Machine which is twice its cost, this will SAVE the labor cost used to operate manual machine as the new machine is automated.
The new machine may be cost saving than of previous machine like using Less Electricity, Less wastage…etc