Exercise-11 (Computation of cash paid for property, plant and equipment)

The C&T Corporation provides you the following information about its two balance sheet accounts at December 31, 2016 and 2017:

Equipment (at cost):
on December 31, 2016: $123,500
on December 31, 2017: $138,500

Accumulated depreciation – equipment:
on December 31, 2016: $83,500
on December 31, 2017: $89,000

The following additional information is available to you:

1. During the the year 2017, the equipment costing $22,500 was sold at a gain of $7,250. The book value of the equipment sold was $9,500.
2. An equipment was purchased for $10,000 and the payment was fully settled by issuing bonds payable.

Required:

1. Compute the amount of cash paid for the purchase of equipment during the year.
2. How would the cash flows resulting from sale and purchase of equipment be reported in the statement of cash flows?

Solution

1. Computation of cash paid for purchase of equipment:

The cash paid for purchase of equipment may be computed by preparing a t-account.

*Cash paid for purchase of equipment has been computed as the balancing figure of the T-account: ($138,000 + $22,500) – ($123,500 + 10,000) = $27,500

2. Reporting sale and purchase of equipment in the statement of cash flows:

The cash paid for the purchase of equipment during the year is $27,000 and the proceeds from sale of equipment during the year is $16,750 ($9,500 cost + $7,250 gain). Both are investing activities and would be reported in the investing activities section of the statement of cash flows. The presentation of cash flows resulting from these two activities is illustrated below:

The simple method explained in this exercise can be used to compute cash paid for any fixed asset.