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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: You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2017. The balance sheet accounts at the beginning and end of the year are shown below.

Dec 31, 2017

Dec 31, 2016

Increase or (decrease)

Cash

\(277,900

\)298,000

(\(20,100)

Accounts receivable

469,424

353,000

116,424

Inventory

741,700

610,000

131,700

Prepaid expenses

12,000

8,000

4,000

Investment in subsidiary

110,500

0

110,500

Cash surrender value of life insurance

2,304

1,800

504

Machinery

207,000

190,000

17,000

Buildings

535,200

407,900

127,300

Land

52,500

52,500

0

Patents

69,000

64,000

5,000

Copyrights

40,000

50,000

(10,000)

Bond discount and issue costs

4,502

0

4,502

Total

\)2,522,030

\(2,035,200

\)486,830

Income tax payable

\(90,250

\)79,600

\(10,650

Account payable

299,280

280,000

19,280

Dividend payable

70,000

0

70,000

Bond payable – 8%

125,000

0

125,000

Bond payable – 12%

0

100,000

(100,000)

Allowance for doubtful accounts

35,300

40,000

(4,700)

Accumulated depreciation – building

424,000

400,000

24,000

Accumulated depreciation – machinery

173,000

130,000

43,000

Premium on bond payable

0

2,400

(2,400)

Common stock – no par

1,176,200

1,453,200

(277,000)

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

109,000

0

109,000

Retained earnings – unappropriated

20,000

(450,000)

470,000

Total

\)2,522,030

\(2,035,200

\)486,830

STATEMENT OF RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER 31, 2017


January 1, 2017

Balance (deficit)

(\(450,000)

March 31, 2017

Net income for first quarter of 2017

25,000

April 1, 2017

Transfer from paid-in capital

425,000

Balance

0

December 31, 2017

Net income for last three quarters of 2017

90,000

Dividend declared—payable January 21, 2018

(70,000)

Balance

\)20,000

Your working papers from the audit contain the following information:

1. On April 1, 2017, the existing deficit was written off against paid-in capital created by reducing the stated value of the nopar stock.

2. On November 1, 2017, 29,600 shares of no-par stock were sold for \(257,000. The board of directors voted to regard \)5 per share as stated capital.

3. A patent was purchased for \(15,000.

4. During the year, machinery that had a cost basis of \)16,400 and on which there was accumulated depreciation of \(5,200 was sold for \)9,000. No other plant assets were sold during the year.

5. The 12%, 20-year bonds were dated and issued on January 2, 2005. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2017.

6. The 8%, 40-year bonds were dated January 1, 2017, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was \(839.

7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2017, for \)100,000. The income statement of Crimson Company for 2017 shows a net income of \(15,000.

8. Major repairs to buildings of \)7,200 were charged to Accumulated Depreciation—Buildings. 9. Interest paid in 2017 was \(10,500 and income taxes paid were \)34,000.

Instructions

From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.

What is the purpose of the statement of cash flows? What

information does it provide?

Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31

Debit Balances 2017 2016

Cash \( 70,000 \) 51,000

Accounts Receivable 155,000 130,000

Inventory 75,000 61,000

Debt investments (available-for-sale) 55,000 85,000

Equipment 70,000 48,000

Buildings 145,000 145,000

Land 40,000 25,000

Totals \(610,000 \)545,000

Credit Balances

Allowance for Doubtful Accounts \( 10,000 \) 8,000

Accumulated Depreciation—Equipment 21,000 14,000

Accumulated Depreciation—Buildings 37,000 28,000

Accounts Payable 66,000 60,000

Income Taxes Payable 12,000 10,000

Long-Term Notes Payable 62,000 70,000

Common Stock 310,000 260,000

Retained Earnings 92,000 95,000

Totals \(610,000 \)545,000

Additional data:

1. Equipment that cost \(10,000 and was 60% depreciated was sold in 2017.

2. Cash dividends were declared and paid during the year.

3. Common stock was issued in exchange for land.

4. Debt investments that cost \)35,000 were sold during the year.

5. There were no write-offs of uncollectible accounts during the year.

Sharpe’s 2017 income statement is as follows.

Sales revenue \(950,000

Less: Cost of goods sold 600,000

Gross profit 350,000

Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000

Income from operations 100,000

Other revenues and expenses Gain on sale of investments \)15,000

Loss on sale of equipment (3,000) 12,000

Income before taxes 112,000

Income taxes 45,000

Net income $ 67,000

Instructions

(a) Compute net cash provided by operating activities under the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Question: Each of the following items must be considered in preparing a statement of cash flows for Blackwell Inc. for the year ended December 31, 2017. State where each item is to be shown in the statement, if at all.

  1. Plant assets that had cost \(18,000 6½ years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for \)4,000.
  2. During the year, 10,000 shares of common stock with a stated value of \(20 a share were issued for \)41 a share.
  3. Uncollectible accounts receivable in the amount of \(22,000 were written off against Allowance for Doubtful Accounts.
  4. The company sustained a net loss for the year of \)50,000. Depreciation amounted to \(22,000, and a gain of \)9,000 was realized on the sale of available-for-sale securities for $38,000 cash.

Question: Which of the following is true regarding the statement of cash flows under IFRS?

  1. The statement of cash flows has two major sections— operating and non-operating.
  2. The statement of cash flows has two major sections— financing and investing.
  3. The statement of cash flows has three major sections— operating, investing, and financing.
  4. The statement of cash flows has three major sections— operating, non-operating, and financing
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