Question 9.14: Calculation of Gain or Loss on the Sale of Long-Lived Assets......
Calculation of Gain or Loss on the Sale of Long-Lived Assets
Moussilauke Diners Inc., a hypothetical company, as a result of revamping its menus to focus on healthier food items, sells 450 used pizza ovens and reports a gain on the sale of $1.2 million. The ovens had a carrying amount of $1.9 million (original cost of $5.1 million less $3.2 million of accumulated depreciation). At what price did Moussilauke sell the ovens?
A. $0.7 million
B. $3.1 million
C. $6.3 million
B is correct. The ovens had a carrying amount of $1.9 million, and Moussilauke recognized a gain of $1.2 million. Therefore, Moussilauke sold the ovens at a price of $3.1 million. The gain on the sale of $1.2 million is the selling price of $3.1 million minus the carrying amount of $1.9 million. Ignoring taxes, the cash flow from the sale is $3.1 million, which would appear as a cash inflow from investing.