Question

Madison Company owned an asset that had cost $44,000. The company sold the asset on January 1, 2016 for $16,000. Accumulated depreciation on the day of sale amounted to $32,000.
Based on this information, the sale would result in:

A. A $16,000 cash inflow in the investing activities section of the cash flow statement.

B. A $16,000 increase in total assets.

C. A $4,000 gain in the investing activities section of the statement of cash flows.

D. A $4,000 cash inflow in the financing activities section of the cash flow statement.

Answer 1

Answer:

A. A $16,000 cash inflow in the investing activities section of the cash flow statement.

Explanation:

The gain on sale of asset is,

Gain on disposal = Selling price - Net Book value of asset

Gain on disposal = 16000 - (44000 - 32000) = $4000

However, this gain is a non cash item as it is only reported on the books and there is no cash inflow or outflow that relates to this gain. Thus, option C and D become invalid as there is no cash related to this disposal gain as it is merely a book item.

A sale of asset doesnot increase but rather decrease total assets so option B become invalid. The correct answer is A as the asset is being sold for 16000 thus a cash inflow of 16000 is taking place.