Correction
Gain or loss equals net proceeds less the asset's carrying amount. Gross cash proceeds are not income.
Why the model fails
Proceeds are consideration received. Gain or loss is the residual after removing carrying amount. Beacon receives $18,000, removes $15,000 carrying amount, and recognizes a $3,000 gain. Calling $18,000 gain would omit the resource consumed in the sale.
Three-number diagnostic
Ask separately for carrying amount, proceeds, and gain or loss, then ask where each appears. Someone who can compute $3,000 but calls it the investing inflow still has not separated income from cash.
Apply the correction
Build a bridge: gross cost less related accumulated depreciation equals carrying amount; net proceeds less carrying amount equals gain or loss. Trace each amount through the entry and statements.
Where to watch
When this mistake may appear
- A depreciable asset is sold for cash after cost and accumulated depreciation are supplied.
- Both the income statement and the cash-flow statement effects have to be traced.
Check your work
Your work may contain this mistake if:
- Credits gain for the full proceeds and leaves the entry out of balance or omits carrying amount.
- Reports only the gain as the investing cash inflow.
- Subtracts the full proceeds in the indirect operating bridge rather than the gain included in net income.