Purchase and Disposal of Opera

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?


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