Below Is Selected Information Taken from the Balance Sheet of LongLi

question 61

Essay

Below is selected information taken from the balance sheet of LongLi Corporation as of 12/31/06.
$$\begin{array} { c c c } & 12 / 31 / 05 & 12 / 31 / 06 \\\text { Gross property, plant, and equipment } & \$ 20,000 & \$ 25,000 \\\text { Accumulated depreciation } & \$ 10,000 & \$ 10,000\end{array}$$
From the operating section of the statement of cash flows, you determine that the depreciation expense for the year was $2,000 and loss on sales of assets was $5,000. The investing section reveals that the company purchased equipment for $14,000 and sold equipment for $2,000.

In the footnotes to the financial statements, the company states:

At the beginning of 2006, we determined that the useful life of our assets was higher than originally believed. Accordingly we have increased the useful life from 10 years to 15 years in 2006.

a. What was the gross book value of the equipment that was sold?
b. What was the net book value of the equipment that was sold?
c. With respect to the change in the useful lives of the assets:

i. What is the effect on 2005's financial statements?
ii. What is the effect on 2006's financial statements?

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Definitions:

Cephalocaudal Pattern

A principle of physical growth that states development progresses from the head (cephalo) towards the tail (caudal), meaning children typically gain control over the head, chest, and arm muscles before those of the legs.

Spinal Cord

A long, thin, tubular structure made up of nervous tissue, extending from the brainstem to the lower back, which transmits neural signals between the brain and the rest of the body.

Sensory Systems

The part of the nervous system responsible for processing sensory information, allowing us to experience the world through sight, sound, touch, taste, and smell.

Kidneys

Organs in the urinary system responsible for filtering waste from the blood and producing urine.