Chapter 23: Q1P (page 1382)

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.

Expert verified

Answer

Net changes in cash totals$115,000

Step by step solution

A cash flow statement is a statement prepared by the companies that show the flow of cash that is inflow or outflow in the business.

Step 2: Statement of cash flow using the indirect method

Particular	Amount $	Amount $
Net income		$370,000
Add/Less: adjustment to net income
Depreciation expenses	125,000
Depreciation expenses of equipment sold	22,000
Gain on sale of equipment	(2,000)
Equity earnings $($ 140, 000 \times 25 %)$	(35,000)	110,000

Add/Less: change in the current assets and liabilities
Decrease in accounts receivable	40,000
Increase in inventory	(135,000)
Increase in accounts payable	60,000
Decrease in income tax payable	(20,000)
Decrease in dividend payable	(20,000)	(75,000)
Cash flow from operating activities		$405,000

Cash flow from investing activities
Proceed from the sale of equipment	40,000
Loan to TLC Co	(300,000)
Semi-annual payment received	50,000
Cash flow from investing activities		(210,000)

Cash flow from financing activities
Dividend payment	$80,000
Cash flow used in financing activities		($80,000)
Net changes in cash		$115,000
Add: opening cash balance		700,000
Ending cash balance		$815,000

Noncash financing and investing activities:
Issuance of the capital lease for an office building		$400,000

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	December 31
	2017	2016
Cash	\(33,500	\)13,000
Accounts receivable	12,250	10,000
Inventory	12,000	9,000
Available-for-sale debt investment	0	3,000
Building	0	29,750
Equipment	45,000	20,000
Patents	5,000	6,250
	\(107,750	\)91,000

Allowance for doubtful accounts	\(3,000	\)4,500
Accumulated depreciation – equipment	2,000	4,500
Accumulated depreciation – building	0	6,000
Accounts payable	5,000	3,000
Dividend payable	0	5,000
Notes payable, short-term (non-trade)	3,000	4,000
Long-term note payable	31,000	25,000
Common stock	43,000	33,000
Retained earnings	20,750	6,000
	\(107,750	\)91,000

Particulars	Dec 31, 2017	Dec 31, 2016
Cash	\(16,500	\)21,000
Short-term investments	25,000	19,000
Accounts receivables	43,000	45,000
Allowance for doubtful accounts	(1,800)	(2,000)
Prepaid expenses	4,200	2,500
Inventory	81,500	65,000
Land	50,000	50,000
Buildings	125,000	73,500
Accumulated depreciation – Buildings	(30,000)	(23,000)
Equipment	53,000	46,000
Accumulated depreciation – equipment	(19,000)	(15,500)
Delivery equipment	39,000	39,000
Accumulated depreciation – delivery equipment	(22,000)	(20,500)
Patents	15,000	0
	\(379,400	\)300,000

Accounts payable	\(26,000	\)16,000
Short-term note payable	4,000	6,000
Accrued payable	3,000	4,600
Mortgage payable	73,000	53,400
Bond payable	50,000	62,500
Common stock	140,000	102,000
Paid-in-capital in excess of par	10,000	4,000
Retained earnings	73,400	51,500
	\(379,400	\)300,000

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