Question

Assume that a company purchases land for \(1,000,000, paying \)400,000 cash and borrowing the remainder with a long-term note payable. How should this transaction be reported on a statement of cash flows?

Short answer

The cash payment for land will come under investing activitiesand borrowing of long-term notes payable will come under non-cash investing and financing activity.

Step-by-step solution

Step 1:Purchase of land for cash

The company's acquisition of the land in exchange for the $400,000 cash payment will be noted as a cash outflow under the cash flow section for investment activities.

Step 2:Purchase of land in exchange of a long-term note payable

The remaining $600,000 ($1,000,000 - $400,000) of land will not be recorded in the statement of cash flow because it represents the borrowings made by the company in the form of issuing a note payable in exchange for the purchase of land. There is no involvement of cash in this transaction, hence will be reported separately under non- cash investing and financing activity.