Red Hot Chili Peppers Co. had the following activity in its most recent year of operations.

(a) Purchase of equipment. (g) Amortization of intangible assets.

(b) Redemption of bonds payable. (h) Purchase of treasury stock.

(c) Sale of building. (i) Issuance of bonds for land.

(d) Depreciation. (j) Payment of dividends.

(e) Exchange of equipment for the furniture. (k) Increase in interest receivable on notes receivable.

(f) Issuance of common stock. (l) Pension expense exceeds the amount funded.

Instructions

Classify the items as (1) operating—add to net income; (2) operating—deduct from net income; (3) investing; (4) financing; or (5) significant noncash investing and financing activities. Use the indirect method.

The equipment is considered a fixed asset. It will come under investing activities as investing activities in the statement of cash flow records all the transactions which are related to investing and sales of assets or investments for cash.

The bonds are issued to raise capital and finance the business operations. So, it will be considered the financing activity as the financing activities record all receipts and payments in cash for raising money and repayment.

The building is considered a fixed asset. It will come under investing activities as investing activities in the statement of cash flow records all the transactions which are related to investing and sales of assets such as buildings, land, etc or investments for cash.

The depreciation will be added to net income under operating activities as it is a non-cash expense and cash flow only records the cash transaction. Earlier while preparing theincome statement, it was deducted. So, under the indirect method, it should be added to net income to reach cash flow from operating activities.

The transaction in which equipment is exchanged for furniture without the involvement of cash, so it means it will come under the significant non-cash investing and financing activities.

The Common stocks are issued by the company to raise additional capital for the business. All the transactions which are related to the raising of capital or repayment to investors come under financing activities. Hence, the issuance of common stock will come under financing activities.

The treatment of the amortization of intangible assets will be very similar to that of depreciation of assets as it is also a non-cash expense. Hence, it will come under operating activity and will be added to net income.

The purchase of treasury stock will come under the financing activity and the company is buying its outstanding stocks from the investors, which were issued earlier to raise capital.

Issuance of bonds for land will come under significant noncash investing or financing activities as there is no involvement of cash in this transaction.

The payment of dividends will come under the financing activity as it is related to the finance of the company.

The increase in the interest receivable will increase the revenue but the revenue has not been received in cash so, it will be deducted from the net income in operating activities.

It will be considered a non-cash operating expense, so the treatment of this will be the addition to the net income in cash flows from operating activities.