Schrade Company bought a machine for $115,000 cash. The estimated useful life wa
ID: 2449056 • Letter: S
Question
Schrade Company bought a machine for $115,000 cash. The estimated useful life was four years, and the estimated residual value was $6,640. Assume that the estimated useful life in productive units is 129,000. Units actually produced were 52,000 in year 1 and 54,000 in year 2.
Indicate the effects of (a) acquiring the machine and (b) recording annual depreciation on the operating and investing activities sections of the statement of cash flows (indirect method) for year 1 (assume the straight-line method).
a the machine acquisition would (increase/decrease) cash provided by (operating/ investing) activities by the (depreciation/purchase) cost of ? b the depreciation cost would (increase/decrease) cash provided by (operating/investing) activites by ?Explanation / Answer
a. Effects of acquiring the machine would decrease cash provided by investing activites by purchase for $115,000.
b. the depreciation cost would not have any impact on cash flow either on operating or investing activities. However, since we are using Indirect method, i.e. we will start from Net profit, therefore, depreciation cost would be added and will increase the operating cash by $27,090 for four years.
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