Custer Construction Co. reported $8,300,000 for equipment and $4,950,000 for accumulated depreciation—equipment on its balance sheet. The equipment was sold in the first week of the fourth year for $23,300. The equipment was sold in the first week of the fourth year for $15,250 instead of $23,300. The equipment was sold at the end of four years for its estimated residual value of $10,000. The equipment was discarded at the end of its useful life with no residual value. The balance of the equipment and its related accumulated depreciation is $140,000. Indicate the effects on the liquidity metric free cash flow and profitability metric asset turnover for each of the above. If no account is affected, leave the corresponding number entry box blank.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Disposal of fixed assets
Custer Construction Co. reported $8,300,000 for equipment and $4,950,000 for
- The equipment was sold in the first week of the fourth year for $23,300.
- The equipment was sold in the first week of the fourth year for $15,250 instead of $23,300.
- The equipment was sold at the end of four years for its estimated residual value of $10,000.
- The equipment was discarded at the end of its useful life with no residual value. The balance of the equipment and its related accumulated depreciation is $140,000.
Indicate the effects on the liquidity metric
| Liquidity Free Cash Flow |
Profitability Asset Turnover |
|
| 1. Equipment sold for $23,300 | $_______ | Choose answer (Higher, Lower or No effect) |
| 2. Equipment sold for $15,250 | $_______ | (Higher, Lower or No effect) |
| 3. Equipment sold at end of 4th year for its residual value of $10,000 | $_______ | (Higher, Lower or No effect) |
| 4. Equipment discarded | $_______ | (Higher, Lower or No effect) |
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