CFA Level I, Finan­cial Repor­ting and Ana­ly­sis, Gain of Sale

A machi­ne was bought for €200,000, it has a use­ful life of five years. The asset has been deemed impai­red in the third year with an impairment of €20,000. It is sold at the end of the fourth year for €100,000. What is the gain of sale?

  1. €30,000
  2. €70,000
  3. €40,000

Solu­ti­on. B is correct. 

The depre­cia­ti­on of €200,000 / 5 = €40,000 has to chan­ge to €30,000 in the fourth year, becau­se the book value at the end of the third year (200,000 – 3*40,000 – 20,000 = €60,000) needs to be allo­ca­ted to the two remai­ning years, year 4 and 5. 

The­re­fo­re, the gain of sale amounts to 

gain of sale = initi­al cost – remai­ning book value when sold = 100,000 – 30,000 = €70,000.

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