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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.

Short Answer

Expert verified

(a) Purchase of equipment :Investing activities

(b) Redemption of bonds payable :Financing activities

(c) Sales of building :Investing Activities

(d) Depreciation :Operating – Add to net income

(e) Exchange of equipment for the furniture :Significant noncash investing and financing activities

(f) Issuance of Common stock :Financing Activities

(g) Amortization of intangible assets :Operating – add to net income

(h) Purchase of treasury stock :Financing Activity

(i) Issuance of bonds for land :Significant noncash investing and financing activity

(j) Payment of dividends :Financing activity

(k) Increase in interestreceivable on notes receivable :Operating – deduct from net income

(l) Pension expense exceeds amount funded :Operating – Add to net income

Step by step solution

01

:Purchase of Equipment (A)

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.

02

Step 2:Redemption of bonds payable (B)

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.

03

Step 3:Sale of the building (C)

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.

04

Step 4:Depreciation (D)

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.

05

Step 5:Exchange of Equipment for furniture (E)

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.

06

Step 6:Issuance of Common Stock (F)

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.

07

Step 7:Amortization of Intangible assets (G)

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.

08

Step 8:Purchase of treasury stock (H)

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.

09

Step 9:Issuance of bonds for land (I)

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

10

Step 10:Payment of dividends (J)

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

11

 Step 11: Increase in Interest Receivable on notes receivable (K)

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.

12

Step 12:Pension expense exceeds amount funded (L)

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.

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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?

Question:Data for the Vince Gill Company are presented in E23-3.

Instructions

Prepare the operating activities section of the statement of cash flows using the direct method.

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: . Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.

(a) Cash payments to employees.

(b) Redemption of bonds payable.

(c) Sale of building at book value.

(d) Cash payments to suppliers.

(e) Exchange of equipment for furniture.

(f) Issuance of preferred stock.

(g) Cash received from customers.

(h) Purchase of treasury stock.

(i) Issuance of bonds for land.

(j) Payment of dividends.

(k) Purchase of equipment.

(l) Cash payments for operating expenses.

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?

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