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Chapter 23: Q6E (page 1376)
Data for Krauss Company are presented in E23-5.
Instructions
Prepare the operating activities section of the statement of cash flows using the indirect method.
The net cash provided by operating activities is computed as $198,500.
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Question: During 2017, Simms Company redeemed \(2,000,000 of bonds payable for \)1,880,000 cash. Indicate how this transaction would be reported on a statement of cash flows, if at all.
The transactions below took place during the year 2017.
1. Convertible bonds payable with a par value of \(300,000 were exchanged for unissued common stock with a par value of \)300,000. The market price of both types of securities was par.
2. The net income for the year was \(410,000.
3. Depreciation expense for the building was \)90,000.
4. Some old office equipment was traded in on the purchase of some dissimilar office equipment, and the following entry was made.
Equipment 50,000
Accum. Depreciation—Equipment 30,000
Equipment 40,000
Cash 34,000
Gain on Disposal of Plant Assets 6,000
The Gain on Disposal of Plant Assets was included in income before income taxes.
5. Dividends in the amount of $123,000 were declared. They are payable in January of next year.
Instructions
Show by journal entries the adjustments that would be made on a worksheet for a statement of cash flows.
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?
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.
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.
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