Purchase and Disposal of Operating Asset and Effects on Statement of Cash Flows On January 1, 2010, Castlewood Company purchased machinery for its production line for $104,000. Using an estimated useful life of eight years and a residual value of $8,000, the annual straight-line depreciation of the machinery was calculated to be $12,000. Castlewood used the machinery during 2010 and 2011, but then decided to automate its production process. On December 31, 2011, Castlewood sold the machinery at a loss of $5,000 and purchased new, fully automated machinery for $205,000.
1. How would the previous transactions be presented on Castlewood’s statements of cash flows for the years ended December 31, 2010 and 2011?
2. Why would Castlewood sell at a loss machinery that had a remaining useful life of six years and purchase new machinery with a cost almost twice that of the old?