Q2P Question:聽The comparative balan... [FREE SOLUTION]

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Chapter 23: Q2P (page 1383)

Question:The comparative balance sheets for Hinckley Corporation show the following information.

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 鈥� equipment
2,000
4,500
Accumulated depreciation 鈥� 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
Additional data related to 2017 are as follows.
1. Equipment that had cost $11,000 and was 40% depreciated at time of disposal was sold for $2,500.
2. $10,000 of the long-term note payable was paid by issuing common stock.
3. Cash dividends paid were $5,000.
4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were $30,000 (net of $2,000 taxes).
5. Investments (available-for-sale) were sold at $1,700 above their cost. The company has made similar sales and investments in the past.
6. Cash was paid for the acquisition of equipment.
7. A long-term note for $16,000 was issued for the acquisition of equipment.
8. Interest of $2,000 and income taxes of $6,500 were paid in cash.
Instructions
Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country

Short Answer

Expert verified

Answer

Net changes in cash totals$20,500.

Step by step solution

Definition of Cash flow Statement

A cash flow statement is a summary of the cash inflows and outflows that occurred during a specific period. This summary of inflows and outflows is prepared in three sections; investing, financing, and operating

Statement of cash flow using the indirect method

Particular	Amount $	Amount $
Net income $($ 20, 750 - $ 6, 000 + $ 5, 000)$		$19,750
Add/Less: Adjustments to net income
Loss on sale	$4,100
Depreciation expenses	1,900
Gains from flood damage	(8,250)	(2,250)

Add/Less: Changes in current assets and liabilities
Increase in accounts receivables net of allowance	(3,750)
Increase in inventory	(3,000)
Increase in account payable	2,000
Gain on sale of investment	(1,700)
Decrease in dividend payable	(5,000)
Patent amortization	1,250
Decrease in short-term notes payable	(1,000)	(11,200)
Cash flow from operations		$6,300

Cash flow from investment
Sales of investment	$4,700
Sale of equipment	2,500
Purchase of equipment	(20,000)
Proceed from flood damage	32,000	19,200

Cash flow from financing activities
Cash dividend paid	(5,000)	(5,000)
Net change in cash		$20,500
Add: opening cash balance		13,000
Ending cash balance		$33,500

Noncash investing and financing activities
Retired notes payable by issuing common stock		$10,000

Working notes:

Calculation of gain or loss on sale of equipment:

Particular	Amount $
Cost	$11,000
Less: Accumulated depreciation (40% on $11,000)	(4,400)
Book value	6,600
Less: Sales price	(2,500)
Loss on sale	$4,100

Calculation of depreciation expenses on equipment:

Particular	Amount $
Accumulated depreciation on equipment sold	$4,400
Less: Decrease in accumulated depreciation	(2,500)
Depreciation expenses	$1,900

Cash paid for the purchase of equipment:

Particular	Amount $
Beginning equipment balance	$20,000
Less: Cost of equipment sold	(11,000)
Remaining balance	$9,000
Purchased equipment with the note	16,000
Adjusted balance	25,000
Ending equipment balance	(45,000)
Equipment purchased for cash	$20,000

Calculation of gain from flood damages:

Particular	Amount $
Cash received	$30,000
Add: taxes	2,000
	32,000
Less: Cost of building net of accumulated depreciation $($ 29, 750 - $ 6, 000)$	23,750
Gain	$8,250

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Debits	December 31
	2017	2016
Cash	\(35,000	\)32,000
Accounts receivables	33,000	30,000
Inventory	31,000	47,000
Property, plant and equipment	100,000	95,000
Unamortized bond discount	4,500	5,000
Cost of goods sold	250,000	380,000
Selling expenses	141,500	172,000
General and administration expenses	137,000	151,300
Interest expenses	4,300	2,600
Income tax expenses	20,400	61,200
	\(756,700	\)976,100

Credits	December 31
	2017	2016
Allowance for doubtful accounts	\(1,300	\)1,100
Accumulated depreciation 鈥� Plant assets	16,500	15,000
Account payable	25,000	15,500
Income tax payable	21,000	29,100
Deferred tax liability	5,300	4,600
8% callable bonds payable	45,000	20,000
Common stock	50,000	40,000
Paid-in-capital in excess of par	9,100	7,500
Retained earnings	44,700	64,600
Sales revenue	538,800	778,700
	\(756,700	\)976,100

(a) Cash collected from customer	(d) Cash paid for income tax
(b) Cash paid to suppliers	(e) Cash paid for selling expenses
(c) Cash paid for interest

	Dec 31, 2017	Dec 31, 2016	Increase or (decrease)
Cash	\(277,900	\)298,000	(\(20,100)
Accounts receivable	469,424	353,000	116,424
Inventory	741,700	610,000	131,700
Prepaid expenses	12,000	8,000	4,000
Investment in subsidiary	110,500	0	110,500
Cash surrender value of life insurance	2,304	1,800	504
Machinery	207,000	190,000	17,000
Buildings	535,200	407,900	127,300
Land	52,500	52,500	0
Patents	69,000	64,000	5,000
Copyrights	40,000	50,000	(10,000)
Bond discount and issue costs	4,502	0	4,502
Total	\)2,522,030	\(2,035,200	\)486,830

Income tax payable	\(90,250	\)79,600	\(10,650
Account payable	299,280	280,000	19,280
Dividend payable	70,000	0	70,000
Bond payable 鈥� 8%	125,000	0	125,000
Bond payable 鈥� 12%	0	100,000	(100,000)
Allowance for doubtful accounts	35,300	40,000	(4,700)
Accumulated depreciation 鈥� building	424,000	400,000	24,000
Accumulated depreciation 鈥� machinery	173,000	130,000	43,000
Premium on bond payable	0	2,400	(2,400)
Common stock 鈥� no par	1,176,200	1,453,200	(277,000)
Paid-in-capital in excess of par 鈥� common stock	109,000	0	109,000
Retained earnings 鈥� unappropriated	20,000	(450,000)	470,000
Total	\)2,522,030	\(2,035,200	\)486,830

STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2017
January 1, 2017	Balance (deficit)	(\(450,000)
March 31, 2017	Net income for first quarter of 2017	25,000
April 1, 2017	Transfer from paid-in capital	425,000
	Balance	0
December 31, 2017	Net income for last three quarters of 2017	90,000
	Dividend declared鈥攑ayable January 21, 2018	(70,000)
	Balance	\)20,000

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Definition of Cash flow Statement

Statement of cash flow using the indirect method

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1. Sale of land \(180,000.	4. Purchase of equipment \)415,000.
2. Purchase of inventory \(845,000.	5. Issuance of common stock \)320,000.
3. Purchase of treasury stock \(72,000.	6. Purchase of available-for-sale debt securities \)59,000.