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ACCA Applied Knowledge · Financial Accounting · Statement of cash flows (excluding partnerships)

Kestrel Co sold a machine for $18,000 cash. The machine had cost $50,000 and accumulated depreciation of $34,000 had been charged on it at the date of sale. What amount is shown in investing activities, and what adjustment is made to profit before tax in operating activities?

The machine's carrying amount is $16,000, so selling it for $18,000 gives a $2,000 profit. The full $18,000 proceeds are an investing inflow, and the $2,000 profit is deducted from profit before tax in the operating section to avoid double counting.

  1. AInflow $18,000; deduct $2,000 profit on disposalCorrect
  2. BInflow $18,000; add back $2,000 loss on disposal
  3. CInflow $16,000; deduct $2,000 profit on disposal
  4. DInflow $18,000; no adjustment is required

Explanation

Carrying amount is 50,000 - 34,000 = 16,000. Proceeds of 18,000 give a profit of 2,000. The full proceeds are an investing inflow, and the non-cash profit is deducted from profit before tax under the indirect method. Adding back would treat it as a loss.

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