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Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Turbulent Indigo Inc. for the year ended December 31, 2017.

(a) Plant assets that had cost \(20,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for \)5,300.

(b) During the year, 10,000 shares of common stock with a stated value of \(10 a share were issued for \)43 a share.

(c) Uncollectible accounts receivable in the amount of \(27,000 were written off against Allowance for Doubtful Accounts.

(d) The company sustained a net loss for the year of \)50,000. Depreciation amounted to \(22,000, and a gain of \)9,000 was realized on the sale of land for \(39,000 cash.

(e) A 3-month U.S. Treasury bill was purchased for \)100,000. The company uses a cash and cash equivalent basis for its cash flow statement.

(f) Patent amortization for the year was \(20,000.

(g) The company exchanged common stock for a 70% interest in Tabasco Co. for \)900,000.

(h) During the year, treasury stock costing $47,000 was purchased.

Instructions State where each item is to be shown in the statement of cash flows, if at all.

Short Answer

Expert verified

(a) Yes

(b) Yes

(c) No

(d) Yes

(e) Yes

(f) Yes

(g) No

(h) Yes

Step by step solution

01

Explanation for Part a

Amount ($)

Plant Assets (cost)

20,000

Accumulated Depreciation (20,000/10) x 6

-12,000

Book Value at date of sale

8,000

Sale Proceeds

-5,300

Loss on sale

2,700

The loss on the sale of plant assets is reported in the operating activities section of the cash flow statement. The loss on the sale of an asset is added to net income to reach net cash provided by operating activities.

The asset that was sold for $5,300 will be reported in the investing activities section of the statement of cash flows by operating activities.

02

Explanation for Part b

The sale of common stock by the company will be reported under the financing activities section of a statement of cash flows.

Saleofcommonstock=Numberofcommonstock×IssuePrice=10,000×43=$430,000

03

Explanation for Part c

Uncollectible accounts receivable of $27,000 that will be written off are not reported on the statement of the cash flows. It only affects allowance for doubtful debts and the accounts receivables balance, it does not affect cash.

04

Explanation for Part d

The net loss, depreciation, and gain on the sale of land will be reported in the operating activities section of the statement of cash flows.

The proceeds from the sale of land will be reported in the investing activities section of the statement of the cash flow.

05

Explanation for Part e

The purchase of the US treasury bill will be reported in the statement of the cash flow. The US treasury bills are considered cash equivalents. So, this transaction will change the cash and cash equivalent and will be reported under financing activities.

06

Explanation for Part f

The patent amortization of $20,000 will be reported in the operating activities section of the statement of cash flows. The amount of amortization will be added to the net income to reach the cash provided by operating activities.

07

Explanation for Part g

The common stocks exchanged with the investments in Tabasco for the amount of $900,000 will be reported in the noncash investing and financing activity as there is no cash involved in this transaction.

08

Explanation for Part h

The purchase of treasury stock with the use of cash will be reported in the cash payment in the financing activities section of the statement of the cash flows of the company.

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Most popular questions from this chapter

Wainwright Corporation had the following activities in 2017:

1. Sale of land \(180,000.

4. Purchase of equipment \)415,000.

2. Purchase of inventory \(845,000.

5. Issuance of common stock \)320,000.

3. Purchase of treasury stock \(72,000.

6. Purchase of available-for-sale debt securities \)59,000.

Compute the amount Wainwright should report as net cash provided (used) by investing activities in its 2017 statement of cash flows.

Hendrickson Corporation reported net income of \(50,000 in 2017. Depreciation expense was \)17,000. The following working capital accounts changed.

Accounts receivable $11,000 increase

Available-for-sale debt securities 16,000 increase

Inventory 7,400 increase

Nontrade note payable 15,000 decrease

Accounts payable 12,300 increase

Compute net cash provided by operating activities.

Question:Mortonson Company has not yet prepared a formal statement of cash flows for the 2017 fiscal year. Comparative balance sheets as of December 31, 2016 and 2017, and a statement of income and retained earnings for the year ended December 31, 2017, are presented as follows.


MORTONSON COMPANY

STATEMENT OF INCOME AND RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER 31, 2017

(\(000 OMITTED)

Sales revenue

\)3,800

Expenses

Cost of goods sold

\(1,200

Salaries and benefits

725

Heat, light and power

75

Depreciation

80

Property tax

19

Patent amortization

25

Miscellaneous expenses

10

Interest

30

2,164

Income before taxes

1,636

Income tax

818

Net income

818

Retained earnings – Jan 1, 2017

310

1,128

Stock dividend declared and issued

600

Retained earnings Dec 31, 2017

\)528


MORTONSON COMPANY

COMPARATIVE BALANCE SHEETS

AS OF DECEMBER 31

(\(000 OMITTED)

Assets

2017

2016

Current assets

Cash

\)333

\(100

U.S treasury notes (available for sale)

10

50

Accounts receivables

780

500

Inventory

720

560

Total current assets

1,843

1,210

Long-term assets

Land

150

70

Building and equipment

910

600

Accumulated depreciation – building and equipment

(200)

(120)

Patent (less: amortization)

105

130

Total long-term assets

965

680

Total assets

\)2,808

\(1,890

Liabilities and stockholder’s equity

Current liabilities

Account payable

\)420

\(330

Income tax payable

40

30

Notes payable

320

320

Total current liabilities

780

680

Long-term note payable

200

200

Total liabilities

980

880

Stockholder’s equity

Common stock

1,300

700

Retained earnings

528

310

Total stockholder’s equity

1,828

1,010

Total liabilities and stockholder’s equity

\)2,808

$1,890

Instructions

Prepare a statement of cash flows using the direct method. Changes in accounts receivable and accounts payable relate to sales and the cost of goods sold. Do not prepare a reconciliation schedule.

Question:(SCF—Indirect Method) The following are Sullivan Corp.’s comparative balance sheet accounts at December 31, 2017 and 2016, with a column showing the increase (decrease) from 2016 to 2017.

Comparative Balance Sheet

2017

2016

Increase (Decrease)

Cash

\(815,000

\)700,000

\(115,000

Accounts receivable

1,128,000

1,168,000

(40,000)

Inventory

1,850,000

1,715,000

135,000

Property, plant and equipment

3,307,000

2,967,000

340,000

Accumulated depreciation

(1,165,000)

(1,040,000)

(125,000)

Investment in Myers Co

310,000

275,000

35,000

Loan receivable

250,000

-

250,000

Total assets

\)6,495,000

\(5,785,000

\)710,000

Account payable

\(1,015,000

\)955,000

\(60,000

Income taxes payable

30,000

50,000

(20,000)

Dividend payable

800,000

100,000

(20,000)

Lease liability

400,000

-

400,000

Common stock, \) 1 par value

500,000

500,000

0

Paid-in-capital in excess of par – common stock

1,500,000

1,500,000

0

Retained earnings

2,970,000

2,680,000

290,000

Total liabilities and stockholders equity

\(6,495,000

\)5,785,000

\(710,000

Additional information:

1. On December 31, 2016, Sullivan acquired 25% of Myers Co.’s common stock for \)275,000. On that date, the carrying value of Myers’s assets and liabilities, which approximated their fair values, was \(1,100,000. Myers reported income of \)140,000 for the year ended December 31, 2017. No dividend was paid on Myers’s common stock during the year.

2. During 2017, Sullivan loaned \(300,000 to TLC Co., an unrelated company. TLC made the first semi-annual principal repayment of \)50,000, plus interest at 10%, on December 31, 2017.

3. On January 2, 2017, Sullivan sold equipment costing \(60,000, with a carrying amount of \)38,000, for \(40,000 cash.

4. On December 31, 2017, Sullivan entered into a capital lease for an office building. The present value of the annual rental payments is \)400,000, which equals the fair value of the building. Sullivan made the first rental payment of \(60,000 when due on January 2, 2018.

5. Net income for 2017 was \)370,000.

6. Sullivan declared and paid the following cash dividends for 2017 and 2016.

2017

2016

Declared

December 15, 2017

December 15, 2016

Paid

February 28, 2018

February 28, 2018

Amount

\(80,000

\)100,000

Instructions

Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2017, using the indirect method.

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2017

2016

Buildings

\( –0–

\)29,750

Equipment

45,000

20,000

Patents

5,000

6,250

Investments

–0–

3,000

Inventory

12,000

9,000

Accounts receivable

12,250

10,000

Cash

33,500

13,000

\(107,750

\)91,000

Share capital—ordinary

\( 43,000

\)33,000

Retained earnings

20,750

6,000

Allowance for doubtful accounts

3,000

4,500

Accumulated depreciation on equipment

2,000

4,500

Accumulated depreciation on buildings

–0–

6,000

Accounts payable

5,000

3,000

Dividends payable

–0–

5,000

Long-term notes payable

31,000

25,000

Notes payable, short-term (non-trade)

3,000

4,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

  1. Equipment that had cost \(11,000 and was 40% depreciated at the time of disposal was sold for \)2,500.
  2. \(10,000 of the long-term notes payable was paid by issuing ordinary shares.
  3. Cash dividends paid were \)5,000.
  4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(32,000.
  5. Equity investments (non-trading) were sold at \)1,700 above their cost.
  6. Cash was paid for the acquisition of equipment.
  7. A long-term note for \(16,000 was issued for the acquisition of equipment.
  8. Interest of \)2,000 and income taxes of $6,500 were paid in cash.

Instructions Prepare a statement of cash flows using the indirect method.

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