T-accounts for Equipment and Accumulated Amortization; the purchase hidden behind the disposal

The fact the case does not state

Haliburton’s Equipment account rose from 300,000 to 380,000. A careless reading reports “purchase of equipment (80,000)” and moves on. But the additional information says equipment costing 40,000 was sold during the year. That disposal took 40,000 out of the account, so more than 80,000 must have gone in. Open a T-account and let the arithmetic find it:

                  Equipment
  Opening        300,000 |
  Purchases            ? |  Disposal (cost)   40,000
  Closing        380,000 |

$$\text{Closing}=\text{Opening}+\text{Purchases}-\text{Cost of disposals}$$

$$380,000=300,000+P-40,000\Rightarrow P=120,000$$

Haliburton bought 120,000 of equipment. The disposal hid 40,000 of buying, and the case will never say “purchases were 120,000” outright — reconstructing it is the skill being marked.

Which part of the purchase is investing

The additional information continues: the 120,000 was paid 110,000 in cash and 10,000 by issuing common shares. Investing reports cash flows. Only the 110,000 is an investing outflow; the 10,000 of equipment acquired for shares never touched cash and is disclosed in a note as a non-cash investing and financing activity (L13.5). Forcing it onto the face as a 10,000 investing outflow and a 10,000 financing inflow is wrong twice — it invents cash that never moved.

The proceeds, not the carrying amount

The equipment sold had accumulated amortization of 12,000, so its carrying amount was 28,000; it fetched 26,000, a loss of 2,000. The disposal entry (L13.2) has exactly one cash line, and it reads 26,000. Investing reports proceeds on disposal of equipment 26,000 — not the carrying amount of 28,000, not the cost of 40,000. Whatever the loss or gain, the inflow is what the buyer paid.

Accumulated Amortization as a check

Open the contra account too:

         Accumulated Amortization – Equipment
                          |  Opening           96,000
  Disposal      12,000    |  Expense (year 2)  34,000
                          |  Closing          118,000

96,000 + 34,000 − 12,000 = 118,000 ✓ — the balance sheet agrees. This account produces no cash line; it proves the two facts you used (the 12,000 removed on disposal and the 34,000 expense). If it does not balance, one of the facts has been misread, or a fact is missing — a second disposal, an impairment — and the operating section is wrong too.

The investing section

Purchase of equipment                             (110,000)
Proceeds on disposal of equipment                   26,000
Net cash used in investing activities              (84,000)

A negative investing total is what a growing company looks like — it is spending on capacity — and it is only a warning when operating cash cannot cover it. Haliburton’s 112,000 covers 84,000 with 28,000 to spare.