A day ago I had an interview for an IB position and was asked the following question, which in general is simple, but some details got me confused:
A piece of equipment was bought 5 years ago for 100k. Annual depreciation is 10k. In the middle of this fiscal year the equipment was sold for 20k. How does this sale impact the three statements.
Now, if it was sold, at the end of the year, it would be an easy question (I'll provide my answer below), but in this case the interviewer specifically pointed out, that it was sold in the middle of the fiscal year.
So, the Accumulated Depreciation of the Equipment is 55k (50k from the previous 5 years and 5k for the half of this year), thus the BV of the Asset is 45k.
INCOME STATEMENT
Loss on the sale of equipment - 25k (BV of 45k minus the price of 20k)
Taxes (assume tax rate of 40%) + 10k (taxes are lower 10k as a result of the loss)
-------------------------------------------------------
Net Income - 15k
CASH FLOW STATEMENT
CFO
NI - 15k
Loss on sale + 25k
-----------------------
CFO is up + 10k
CFI
Proceedings from the sale + 20k
----------------------
CFI is up +20K
---------------------------------------------
Cash Flow is up +30k
BALANCE SHEET
Cash +30k
PPE - 45k
----------------
Assets - 15k
Equity (through RE) - 15k
------------------------
Liabilities+Equity - 15k
So, we are balanced.
Now, my problem is that we are in the middle of the fiscal year, so probably we should show the accrued depreciation expense for the first six months in the IS, but then how should we adjust all the numbers in the CF statement and in the BS?
The interviewer said, that it made a difference, but I still couldn't figure out what he was expecting.
Thanks a lot!
Not sure I understand your actual question, but your cash flows should have increased by amount you sold for 20K, CFO should be a wash.
No, he is correct - his cash flow should increase by the 20K AND the cash saved due to the loss (25k * tax rate) = 30K
CFO: -15 +25 (your non-cash "expense") = 10To the OP: You have to solve this in your head?? Or do you have pen/paper/excel?
EDIT: I am not sure if your interviewer is asking you to add back the D&A (5K) for the year into your P&L and CFS. I thought about it, but finally decided doing so wouldn't make sense.
To include the effects of D&A this way, you need to assume that D&A increase while everything else remain constant... things are not constant here (you have adjusted accumulated depreciation to increase to 55K).
That is why the usual interview questions goes " all else constant... what if D&A increase by $X" (you don't go into the accumulated depreciation school-of-thought).
I had to do it all in my head, no pen, paper or excel. So, it was tough
I was thinking that he expected me to show the 5k depreciation for the half year on IS, that would mean, the BV would be 50k, rather than 45k shown above. But then I can't get consistent numbers in other statements. I went through my accounting books, but couldn't find anything helpful.
Of course, there is the possibility that the interviewer was just trying to distract me (which he successfully did), in that case, I guess the provided solution should be right.
Anyway, I was wondering if there's another approach/solution which I am not aware of
Thanks for the replies
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