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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

Question: . Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.

(a) Cash payments to employees.

(b) Redemption of bonds payable.

(c) Sale of building at book value.

(d) Cash payments to suppliers.

(e) Exchange of equipment for furniture.

(f) Issuance of preferred stock.

(g) Cash received from customers.

(h) Purchase of treasury stock.

(i) Issuance of bonds for land.

(j) Payment of dividends.

(k) Purchase of equipment.

(l) Cash payments for operating expenses.

Question: E23-13 (L02,3) (SCF—Direct Method) Brecker Inc., a greeting card company, had the following statements prepared as of December 31, 2017.

BRECKER INC.

COMPARATIVE BALANCE SHEET

AS OF DECEMBER 31, 2017 AND 2016


12/31/17

12/31/16

Cash

\(6,000

\)7,000

Accounts receivable

62,000

51,000

Short-term-debt (available for sale)

35,000

18,000

Inventory

40,000

60,000

Prepaid rent

5,000

4,000

Equipment

154,000

130,000

Accumulated depreciation – Equipment

(35,000)

(25,000)

Copyrights

46,000

50,000

Total assets

\(313,000

\)295,000

Account payable

\(46,000

\)40,000

Income tax payable

4,000

6,000

Salaries and wages payable

8,000

4,000

Short-term loans payable

8,000

10,000

Long-term loans payable

60,000

69,000

Common stock, \(10 par

100,000

100,000

Contributed capital, Common stock

30,000

30,000

Retained earnings

57,000

36,000

Total liability and stockholders equity

\)313,000

\(295,000


BRECKER INC.

INCOME STATEMENT

FOR THE YEAR ENDING DECEMBER 31, 2017

Sales revenue

\)338,150

Cost of goods sold

(175,000)

Gross profit

163,150

Operating expenses

(120,000)

Operating income

43,150

Interest expenses

\(11,400

Gain on sale of equipment

2,000

9,400

Income before taxes

33,750

Income tax expenses

6,750

Net income

\)27,000

Additional information:

1. Dividends in the amount of \(6,000 were declared and paid during 2017.

2. Depreciation expense and amortization expense are included in operating expenses.

3. No unrealized gains or losses have occurred on the investments during the year.

4. Equipment that had a cost of \)20,000 and was 70% depreciated was sold during 2017.

Instructions

Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)

Following are selected statement of financial position accounts of Sander Bros. Corp. at December 31, 2017 and 2016, and the increases or decreases in each account from 2016 to 2017. Also presented is selected income statement information for the year ended December 31, 2017, and additional information.

Selected statement of financial position accounts

2017

2016

Increase

(Decrease)

Assets

Property, plant, and equipment

\(277,000

\)247,000

\(30,000

Accumulated depreciation

(178,000)

(167,000)

(11,000)

Accounts receivable

34,000

24,000

10,000

Equity and liabilities

Share capital—ordinary, \)1 par

\( 22,000

\) 19,000

\( 3,000

Share premium—ordinary

9,000

3,000

6,000

Retained earnings

104,000

91,000

13,000

Bonds payable

49,000

46,000

3,000

Dividends payable

8,000

5,000

3,000

Selected income statement information for the year ended December 31, 2017

Sales revenue

\)155,000

Depreciation

38,000

Gain on sale of equipment

14,500

Net income

31,000

Additional information:

  1. During 2017, equipment costing \(45,000 was sold for cash.
  2. Accounts receivable relate to sales of merchandise.
  3. During 2017, \)25,000 of bonds payable were issued in exchange for property, plant, and equipment.

There was no amortization of bond discount or premium.

Instructions Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items.

  1. Payments for purchase of property, plant, and equipment.
  2. Proceeds from the sale of equipment.
  3. Cash dividends paid.
  4. Redemption of bonds payable.

Question: Collinsworth Co. reported sales on an accrual basis of \(100,000. If accounts receivable increased \)30,000 and the allowance for doubtful accounts increased \(9,000 after a write-off of \)2,000, compute cash sales.

Question: ETHICS (Cash Flow Reporting)

Brockman Guitar Company is in the business of manufacturing top-quality, steelstring folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company’s poor performance in recent years. In particular, the company’s lead bank, First Financial, is especially concerned about Brockman’s inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.” Thinking about the banker’s comment, Barbara came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell Barbara what you think of her plan.

Instructions

Answer the following questions.

(a) What are the ethical issues related to Barbara Brockman’s idea?

(b) What would you tell Barbara Brockman?

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