Included in Leonie’s fixed assets was a piece of machinery which cost £68 000 and on which depreciation of £32 000 had been charged. This was sold during the year for £28 000.
- what would be the effect, if any, on the income statement and the cash flow statement?
A) Show a loss on sale of fixed asset in the income statement of £8000 and show that as a cash outflow
B) Show a loss on sale of fixed asset in the income statement of £40000 and show that as a cash outflow
C) Show a loss on sale of fixed asset in the income statement of £8000 and show a cash inflow of £36000
D) Show a loss on sale of fixed asset in the income statement of £8000 and show a cash inflow of £28000
E) None of the above

Question

Included in Leonie’s fixed assets was a piece of machinery which cost £68 000 and on which depreciation of £32 000 had been charged.  This was sold during the year for £28 000.  
- what would be the effect, if any, on the income statement and the cash flow statement?
A) Show a loss on sale of fixed asset in the income statement of £8000 and show that as a cash outflow
B) Show a loss on sale of fixed asset in the income statement of £40000 and show that as a cash outflow
C) Show a loss on sale of fixed asset in the income statement of £8000 and show a cash inflow of £36000
D) Show a loss on sale of fixed asset in the income statement of £8000 and show a cash inflow of £28000
E) None of the above

Quizplus · Accepted Answer

The sale of the fixed asset will result in a loss on the income statement, calculated as follows: Sale price (£28,000) – Net book value (£36,000 = cost £68,000 – accumulated depreciation £32,000) = Loss on sale of £8,000. This loss will be shown as an expense in the income statement. 
The cash flow statement will show a cash inflow of £28,000 from the sale of the fixed asset. The initial cost and depreciation of the asset are not relevant to the cash flow statement as they are non-cash items.

Included in Leonie’s Fixed Assets Was a Piece of Machinery