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:

Demand Increase

A situation in which the quantity of a product or service that consumers are willing and able to purchase at a given price rises over time.

Wage Attraction

The potential of an employer or a sector to draw employees by offering competitive or attractive wages.

Supply Plentiful

A market condition where there is an ample amount of goods or services available to meet consumer demand.

Market Wages

The prevailing pay rates for jobs in a given market, determined by supply and demand for labor in that market.