Question

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

(a) Yes

(b) Yes

(c) No

(d) Yes

(e) Yes

(f) Yes

(g) No

(h) Yes

Step-by-step solution

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.

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.

$\begin{array}{c}\mathrm{Sale}\mathrm{of}\mathrm{common}\mathrm{stock}=\mathrm{Number}\mathrm{of}\mathrm{common}\mathrm{stock}\times \mathrm{Issue}\mathrm{Price}\\ =10,000\times 43\\ =\$430,000\end{array}$

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.

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.

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.

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.

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.

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.