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Chapter 23: Q12 (page 1374)

In 2017, Leppard Inc. issued 1,000 shares of \(10 par value common stock for land worth \)40,000.

(a) Prepare Leppard鈥檚 journal entry to record the transaction.

(b) Indicate the effect the transaction has on cash.

(c) Indicate how the transaction is reported on the statement of cash flows.

Short Answer

Expert verified

(a) The journal entry to record this transaction is, land is debited, and common stock and paid-in capital in excess of par are credited.

(b) There will be no effect on cash.

(c) Transaction will come under schedule of non-cash investing and financing activities.

Step by step solution

01

:Journal entry to record the transaction

Journal

Date

Particulars

Debit ($)

Credit ($)

Land

40,000

Common Stock

10,000

Paid-In Capital in Excess of Par- Common Stock

30,000

(Purchase of land is recorded)

02

:Effect of the transaction on cash

There will be no effect of the transaction on cash because the company purchased the land in exchange of common stock which means the company paid with common stock instead of cash.

03

:Preparation of statement of cash flow (partial)

Statement of cash flow (Partial)

Noncash investing and financing activities:

Purchase of land through the issuance of common stock

$40,000

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Most popular questions from this chapter

Question: Why is it desirable to use a worksheet when preparing a statement of cash flows? Is a worksheet required to prepare a statement of cash flows?

Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance. From what sources does the information to prepare this statement come, and what information does each source provide?

The income statement of Vince Gill Company is shown below.

VINCE GILL COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Sales revenue \(6,900,000

Cost of goods sold

Beginning inventory \)1,900,000

Purchases 4,400,000

Goods available for sale 6,300,000

Ending inventory 1,600,000

Cost of goods sold 4,700,000

Gross profit 2,200,000

Operating expenses

Selling expenses 450,000

Administrative expenses 700,000 1,150,000

Net income \(1,050,000

Additional information:

1. Accounts receivable decreased \)360,000 during the year.

2. Prepaid expenses increased \(170,000 during the year.

3. Accounts payable to suppliers of merchandise decreased \)275,000 during the year.

4. Accrued expenses payable decreased \(100,000 during the year.

5. Administrative expenses include depreciation expense of \)60,000.

Instructions

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2017, for Vince Gill Company, using the indirect method.

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鈥檚 poor performance in recent years. In particular, the company鈥檚 lead bank, First Financial, is especially concerned about Brockman鈥檚 inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, 鈥淚 can鈥檛 even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.鈥� Thinking about the banker鈥檚 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 鈥渨indow dress鈥� 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鈥檚 idea?

(b) What would you tell Barbara Brockman?

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鈥擡quipment 21,000 14,000

Accumulated Depreciation鈥擝uildings 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鈥檚 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.
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