Question

On January 1, Year 5, Raven Limo Service, Inc. sold a used limo that had cost $64,000 and had accumulated depreciation of $36,000. The limo was sold for $30,000 cash. Which of the following shows how the sale of the limo would affect Raven's financial statements?

a. Cash- 30,000
b. Limo- (64,000)
c. Acc Dep- (36,000)
d. Liab- NA
e. Equity- 2,000
f. Gain- 2,000
g. Loss- NA
h. Net Inc- 2,000
I. Cash Flow- 30,000 IA

Answer 1

The sale of the limo affected Raven's financial statements by increasing cash, reducing the limo asset and accumulated depreciation, and increasing equity by the gain amount; the gain also contributed to net income and was reported on the cash flow statement as an investing activity.

Step-by-step explanation:

When Raven Limo Service, Inc. sold the used limo, the transaction led to various changes in the financial statements. Initially, the limo had a cost of $64,000 with accumulated depreciation of $36,000, resulting in a net book value of $28,000 ($64,000 - $36,000). The sale price was $30,000, leading to a gain of $2,000 ($30,000 - $28,000).

• Cash increases by $30,000.
• The limo asset is debited to remove it from the books, with the original cost of $64,000.
• Accumulated depreciation on the limo is also removed, amounting to $36,000.
• Liabilities are not affected by this transaction (N/A).
• Equity increases by the gain amount, which is $2,000.
• A gain of $2,000 is recognized on the Income Statement, contributing to Net Income.
• The Cash Flow Statement shows an inflow of $30,000 in the Investing Activities (IA).