Question

Equipment with an original cost of $75,000 and accumulated depreciation of $20,000 was sold at a loss of $7,000. As a result of this transaction, cash would _________:
Group of answer choices:
O increase by $48,000
O decrease by $7.000
O increase by $55.000
O decrease by $27.000

Answer 1

Answer:

O increase by $48,000

Explanation:

A loss is made on disposal of an asset when the amount received from the disposal is lower than the carrying amount of the asset. The carrying amount or net book value of an asset is the difference between the cost of the asset and its accumulated depreciation.

Hence

Carrying amount = $75,000 - $20,000

= $55,000

Let the amount received on disposal be K

K - $55,000 = -$7,000

K = $55,000 - $7,000

= $48,000

This is the amount received from the disposal and it represents an increase in cash.